NAB takes refuge in the north
National Australia Bank will shift £6 billion in commercial loans from its Clydesdale Bank arm in the UK to the main operating entity in Australia, with the bank opting for a version of the "good bank, bad bank" solution to the continuing losses from its UK business.
The assets NAB is putting in to run-off (all of them commercial real estate loans) are equal to one fifth of the receivables of NAB's UK business. A minor proportion of commercial loans in run-off will remain on the books of Clydesdale Bank.
The decision ends three years of hesitation about the bank's best options for its UK arm in the wake of the global financial crisis and resulting weakened state of the British economy.
NAB will shrink its UK business to established footprints in Scotland and in northern England, centred on Yorkshire.
Twenty-nine business banking centres, most of them in southern England, will close, leaving 43 still operating.
Establishing this network of business banking centres was a hallmark of the Frank Cicutto-era strategy for NAB in the UK and was reinvigorated during the John Stewart era when the bank styled itself as an "attacker" in the local banking market.
Clydesdale will also shut six operational centres and centralise more operations in Glasgow. The bank said 1400 staff - a quarter of the total - will lose their jobs, most of them in England.
There are £456 million in costs arising from the restructure. NAB said it will recognise £195 million in restructuring costs and also write off £141 million in goodwill. The bank has also had to take another £120 million for mis-selling of consumer credit insurance.
It is not clear how much of the £456 million in costs mentioned above NAB is excluding from its measure of "cash earnings" - which is actually a loss - in the UK for the current half.
This loss is £25 million. This compares with a "cash profit" for the UK in the year to September 2011 of £183 million. On the other hand, Clydesdale Bank in fact reported a profit of only £18 million that year.
The reduction in group capital from these charges will be lower, at £279 million.
David Thorburn, NAB's chief executive in the UK, told a conference call with investors yesterday that the changes "will reduce the risk profile of the business and deliver returns that are both acceptable and achievable."
He said the business banking centres had operated as "one size fits all, and... [were] prone to providing a level of service that some customers didn't need or were unwilling to pay an economic rate for.
"In the future, we will serve smaller businesses with straightforward needs through a direct platform and reserve the most costly face-to-face surface for those larger businesses with more sophisticated needs."
Thorburn also said there will be changes to the "risk and control framework" but did not elaborate.
Cameron Clyne, CEO of NAB, told the investors during the conference call: "We've never received a formal offer for this bank, we've never rejected a formal offer, so it's not as though we are walking past deals in the last three and a half years.
"But, as you [would] expect, there has been speculation over the asset and we have received informal expressions of interest, all of which... [were] very low valuations and also highly conditional, and… very difficult to execute.
"I think as long as the UK banks are trading at the sort of valuations they are then it's going to be difficult. I think the option we're taking is a better option."