Clydesdale’s claims to be a prudent lender ring hollow following NAB ‘review’

By Ian Fraser

Published: Sunday Herald

Date: February 12th, 2012

From the perspective of its head office in Melbourne’s Bourke Street, National Australia Bank’s UK subsidiaries Clydesdale Bank and Yorkshire Bank are looking increasingly like dead weights at the moment.

The Australian economy, where the Victoria-based bank has the bulk of its operations, is booming and NAB is putting on searing profits growth. By contrast the Scottish and UK economies – where NAB has owned Clydesdale Bank since 1987 and Yorkshire since 1990 – are in the doldrums.

Given the failure of the UK’s coalition government to kickstart economic growth, there are growing fears of a long-lasting recession, which would trigger further slides in British property values, further denting NAB’s chances of getting a decent returns out of its UK subsidiaries.

It seems that NAB’s 43-year-old chief executive Cameron Clyne has succumbed to pressure from investors, who are increasingly disenchanted with NAB’s continued ownership of what they see a pair of underperforming banks in what has become one of the world’s shakier economies.

He announced the group is embarking on a four-month “strategic review” of its UK arm – corporate shorthand for a closure, a sale or a savage restructuring. He blamed the decision on feeble UK growth, the eurozone sovereign debt crisis and “the continuing austerity program by the UK government”.

“We felt the [British] economy was bottoming last year and now that’s clearly not the case,” Clyne told the Sydney Morning Herald. “It’s likely the UK will be in a prolonged recession.”

Clyne  also cited a recent change in policy at state-rescued banks RBS and Lloyds which, three years on from the crash, are abandoning their “delay and pray”, “extend and pretend” approach to bad and doubtful debts by accelerating their write-downs of toxic property loans. The move is expected to have serious knock-on effects across the commercial property market, where Clydesdale Bank is heavily exposed.

“I wouldn’t want to close off people’s speculation they’ll enjoy in the next couple of months,” added Clyne. “What we are committed to is to come back as quickly as possible”.  He said the results of the strategic review, in which he said nothing has been ruled out, or ruled in for Clydesdale, would be unveiled no later than NAB’s interim results announcement on May 10.

Despite Clyne’s rhetoric of recession and even though Clydesdale has managed to maintain profitability since the financial crisis struck — it made pre-tax profits of £237m in the year to September 30, 2011 — informed banking industry experts say that many of Clydesdale and Yorkshire’s wounds are self-inflicted.

One analyst said:

“NAB has massively under-invested in its UK businesses for years. They have inadequate financial reporting systems, they have a lacklustre to disappointing commercial property portfolio, and they have higher capital costs than other banks.”

He added that the bank’s cost of capital has risen following its failure to persuade the UK regulator the Financial Services Authority to accord it the Advanced Internal Ratings Based (AIRB) status given to most other UK clearing banks.

“After a number of failed initiatives – including the planned acquisition of 600 Lloyds branches and a possible flotation of the UK businesses – proved unrealistic, it seems that Cameron Clyne lost patience.”

The bank is said by analysts to have “legacy issues” after making an ill-timed entry into the UK’s commercial property market in 2004-05.

Ex-insiders said Clydesdale was no less guilty than the likes of HBOS of making “dodgy” loans to fund speculative developments in Scotland’s central belt and North of England at the worst time in the economic cycle in 2005-07. This has led to some serious balance sheet issues, as many of these loans are unlikely ever to be repaid in full.

Many of the loans were advanced by the group’s semi-autonomous Financial Solutions Centres, which came under executive director Mike Williams‘ Integrated Financial Solutions division, and were introduced in a blaze of publicity in 2005.

One ex-Clydesdale Bank commercial property insider said:

“Some crazy stuff was going on, like financing a block of flats in central Glasgow at 105% loan-to-value. Some of the guys in Yorkshire Bank just went daft for property. One lent £15m to build a 20-storey block of flats in Manchester, but the developer ran out of money after building just four floors. That was held up internally as an example of what not to do.

“In Clydesdale Bank it was not unknown for people to lend seven figures sums without any credit application and with no security instructed. There were also examples of chartered surveyors providing inflated valuations. A lot of the dodgy lending happened because executives were so desperate for bonuses.”

Inadequate systems are also said to have been partially to blame. The ex-insider said the Glasgow-based bank “discovered” that 90% of its non-retail lending was to commercial property in March 2010, after it properly computerising its systems. Before that individual Clydesdale bankers had recorded their lending activies om Excel spreadsheets, said the ex-insider.

“To clean up the mess they’re tightening the screws on borrowers, hiking up the arrangement fees causing some real pain, and they’ll also be trying to get the dodgiest loans off their books. If they hadn’t had NAB to bail them out over the past four years, they’d probably be bust by now.”

Last week, Clydesdale chief executive David Thorburn conceded that the economics of the bank’s commercial property business were “challenging”. Last month it stopped issuing any new commercial property loans.

Clydesdale’s plight has been worsened as a result of NAB’s  inability to expand its UK presence through acquisitions, say analysts. They claim that when large collections of RBS and Lloyds branches were put on the block at the insistence of the European Union, NAB was not considered a serious contender by the FSA.

Owning Clydesdale has become an expensive business for NAB. One analyst said the bank is now required by the FSA to set aside about £800m loss-absorbing capital – proportionately, more than larger banks – as a result of fears that its legacy loan portfolio may have turned sour.  Overall NAB has been forced to transfer £2 billion of capital into Clydesdale in the past couple of years, with £530m transferred last month alone. The analyst told the Sunday Herald: “From NAB’s perspective Clydesdale appears to have been costing more money than it has been making.”

Clyne’s predecessor, John Stewart, sold NAB’s two Irish banks – National Irish Bank and Northern Bank — for £967m to Denmark’s Danske in December 2004 three years before the crisis struck.  This followed a scandalous episode for the Melbourne-based group when “rogue trader” John Rusnak was found to have covered up losses of A$360m following disastrous currency bets. Many investors are now wishing it had sold Clydesdale and Yorkshire at the same time

David Thorburn, Clydesdale’s chief executive declared that “tough decisions” would have to be taken, but said he was completely confident that “we will emerge from the strategic review in a strong position and very well placed to challenge the bigger banks in the UK.”

He conceded that current returns are “unacceptable to me or our shareholders” and acknowledged the review will lead to job cuts. He said: “A significant proportion of our cost base is represented by employees. You cannot get into a review of this nature without having an impact there. We do not know exactly what and when.”

Unite national officer David Fleming said: “This came out of the blue. Unite have grave concerns about the scale and the commitment of NAB in the UK.” The union said it is holding urgent talks with Thorburn and his management team about the implications for staff.

Quizzed about potential job losses among Clydesdale’s 4200 Scottish staff during First Minister’s questions last week, SNP leader Alex Salmond must have been grateful Clyne did not also cite uncertainty caused by the possibility of Scottish independence as a reason for the review.

Labour’s Drew Smith asked Salmond about possible job losses at Clydesdale saying “What assurances can the first minister provide, and will he meet with union representatives?” Salmond said he had already spoken to Thorburn and would meet with Unite representatives. He read out the National Australia Bank statement, confirming the review had owed its origins to the lack of growth prospects in UK. Salmond told the Scottish parliament that Tory economic policy was more damaging to the Scottish economy than the possibility of independence.

Last week Murdo Fraser MSP, Convenor of the Economy, Energy and Tourism Committee, wrote to John Swinney saying: “It is deeply concerning that this review might lead to significant loss of jobs or to a marked reduction in the presence of competitors to the two largest banks on our High Streets”.

A spokesman for Clydesdale said the review is unlikely to be purely about cost-cutting. “We’re growing certain areas too, including direct, online and telephone banking.” So it seems having failed to develop aa UK footprint through acquisitions extend its reach through other means.  The spokesman said the aim is to ensure Clydesdale is “a more self-sufficient bank, and is as capital-efficient and business-efficient as possible”.

The bank is seen as far more likely to wind down its corporate and commercial side of its business side. Despite the troubles over mispriced mortgages last year, Thorburn said Clydesdale’s retail banking arm is robust. “That business, if you look at the impact of the external environment on it, has stood up very well.”

Banking industry insiders say if Clydesdale is sold, it is unlikely to fetch the A$2.5bn being targeted by NAB, given the economic climate and state of its balance sheet.

If Clydesdale is sold, possible bidders include NBNK Investments, a shell company which counts Lord McFall, Lord Forsyth and Lord Levene among its board directors. Other possible bidders include One Savings, backed by US private equity firm JC Flowers and Hugh Osmond’s Sun Capital Partners.

Sun Capital has already had one offer for Clydesdale rebuffed according to market sources. In October Clyne said NAB would “not be engaging in any fire sales” of its UK banks.

John Morrison, a director of Luxembourg-based financial consultancy Asymptotix, said:

“Clydesdale is now in the hands of consultants, all flavours; probably lawyers as well; all Clyne is doing is shouting louder to the world ‘this bank is on the block’. The loudness that Clyne is now shouting probably indicates that NAB would consider a Hoare Govett-type deal – basically give the business  away for one pound, as long as the buyer pledges to honour the debts. I suspect they have completed the drill through of their loan book and they’re looking at a scary mess.”

An edited version of this article was published under the headline ‘Who’s to blame for Clydesdale troubles’ in the Sunday Herald on January 12th, 2012

Clydesdale Bank – Fact Box

1838: Clydesdale Bank established in Glasgow with a first branch in Edinburgh

1859: Yorkshire Bank established in Halifax, West Yorkshire in 1859

1987: NAB acquires Clydesdale Bank

1990: NAB acquires Yorkshire Bank

1995-98: Fred Goodwin is deputy CEO, then CEO of Clydesdale Bank

2000:  NAB approaches the Bank of Scotland with proposal that BoS acquires its UK and Irish assets, including Clydesdale and Yorkshire. In return, BoS would hand NAB its stake in BankWest in Australia.

2004: Clydesdale and Yorkshire complete their merger, with Yorkshire becoming a “sub-brand” of Clydesdale.

2005: Clydesdale establishes a network of quasi-autonomous “Financial Solutions Centres” as a form of laboratory, in year the bank announces it is axing 1,700 jobs and closing 100 branches.

2005-06: The bank’s Integrated Financial Solutions unit becomes a significant player in the UK commercial property market.

2010-11: Clydesdale is not considered a serious bidder by the FSA when various portfolios of bank branches come on the market in the wake of the financial crisis.

2010: Clydesdale apologises to customers after admitting it failed to accurately calculate the interest on some mortgages.

March 2011: Clydesdale announces CEO Lynne Peacock is to depart

July 2011: David Thorburn takes over as CEO

Sept 2011: Clydesdale is downgraded by credit rating agency Moody’s, after NAB chief executive Cameron Clyne reveals the Melbourne-based bank has reduced its commitment to owning Clydesdale.

Yorkshire Bank: 185 branches
Clydesdale Bank: 152 branches
Financial Solutions Centres: 72

Employees:-
UK: 8,300
England: 4,100
Scotland 4,200

Profits year to Sept 2011: £237m
Total assets at Sept 2011: £44.9bn

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