Clydesdale Bank is set to be “reshaped” ahead of a possible sale after economic conditions in the UK deteriorated in the final three months of 2011.
David Thorburn, chief executive of the Australian-owned bank, will lead a three-month review of the Clydesdale and sister lender Yorkshire Bank. He has not ruled out branch closures or job cuts.
There will be a particular focus on business banking and commercial property loan books after bad debt provisions rose in the quarter.
Parent group National Australia Bank highlighted high regulatory costs and dwindling returns on investment at its UK operations.
The announcement of the review is likely to raise alarm among the bank’s 8,300 UK employees and unions yesterday said the move was cause for “grave concerns”. David Fleming, Unite national officer, said: “News of this strategic review has come out of the blue for the workforce of Clydesdale and Yorkshire banks across the UK. Unite has grave concerns about the scale of the review and over the future commitment of NAB within the UK.”
Thorburn said the retail side of the bank – mainly mortgage and personal lending and deposits – was less likely to be hit, but he would not rule out closures of any of the firms 337 branches.
He said the retail banking businesses were “better than they were in 2008” at the start of the banking crisis. “I can’t see a need for further change in that [the retail bank], the economics still make sense today,” added Thorburn.
However, he said the “economics of business banking in its broadest sense have become quite challenging since the credit crunch.”
Thorburn noted: “That is something we will look at as part of this review.”
According to the bank’s first-quarter trading update – which is for the final three months of 2011 – “bad and doubtful” debts or impaired loans in the UK rose slightly to 3.22 per cent from 3.12 per cent, while the charges on the bad loans jumped to 1.27 per cent from 0.86 per cent. This mostly affected the firm’s business bank, “predominantly related to commercial property lending”, Thorburn said.
The bank’s commercial property loan book amounted to about a fifth of its overall lending. Thorburn added that there has been a “fundamental shift in the economics of banking” and pointed to the higher costs of regulation, where new rules require all European banks to increase capital ratios and liquidity.
“Since the global financial crisis, our funding costs have more than doubled, the capital we hold has increased by over a third. We are investing in the region of £25m every year because of regulatory changes,” said Thorburn.
“If you add those impacts to the economic environment and what it is doing to our customers’ business, our returns have suffered. That is not acceptable to me or our shareholders.”
Although Thorburn refused to openly discuss a possible sale, it is thought NAB is keen to improve the business in order to get a better price.
Credit Suisse analyst James Ellis said: “It’s very difficult to achieve book value in a divestment in the current environment – it would, therefore, seem unlikely that’s what the strategic review would seek near term.”
Analysts said the Clydesdale and Yorkshire currently have a combined book value of A$4.5 billion (£3bn). NAB rejected a £2bn bid made for the business by pizza entrepreneur Hugh Osmond’s investment vehicle, Sun Capital, in September. It is thought that NBNK, which was frustrated in its bid for 613 Lloyds Banking Group branches, would still be in the running as a potential buyer.
NAB reported a profit of A$1.4bn for the quarter, up 7.7 per cent on a year earlier.
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