Bank on the brink

In 1899 it became the first Scottish bank to introduce adding machines to its branches. In 1958 it became the first to advertise on television and in the same year it was the first to introduce personal loans. It was also the first Scottish bank to offer cheque guarantee cards to its customers and the first British bank to invest in computer terminals for its tellers.

This bank also prompted a government inquiry when it became the first in Scotland to open branches in England as far back as 1874.

If asked to guess the identity of this pioneering bank, many people would probably name Bank of Scotland or Royal Bank of Scotland - the twin Goliaths of Scotland’s modern financial services scene.

But they would be wrong. The answer is the Clydesdale.

This may come as a surprise to followers of the bank’s recent calamity-strewn history. Last Monday, its fourth boss in two years, John Stewart, stepped up to replace Frank Cicutto as chief executive of parent company National Australia Bank, its owner since 1987. Cicutto resigned on Monday after rogue currency traders at the bank cost NAB an estimated 150m by betting wrongly against the US dollar.

Cicutto is best known for claiming that Scotland had been "in a permanent recession for the past 200 years" - known as his ‘Ratner moment’ and one that prompted an outcry. The then enterprise minister Wendy Alexander called him a "gnome" and the subsequent backlash from Scottish business groups and politicians forced the Australian to make a groveling apology. It hardly helped to endear his bank to Scotland although Clydesdale denies that any lasting damage was done.

What is a problem is the frequency of changes at the top of the Glasgow bank. Stewart, who flew to Melbourne at short notice last week, arrived from Barclays last year to replace Steve Targett, who was poached by Lloyds TSB after only three months in the post. Before that, Grahame Savage was given early retirement and a 488,000 pay-off after just nine months keeping the seat warm.

Stewart is widely seen by analysts as having the necessary experience of the UK banking market to transform Clydesdale and Yorkshire’s fortunes. But the constant switching of personnel in Scotland is seen by outsiders as unsettling.

Since Clydesdale and Yorkshire have been left behind by larger rivals, Stewart has his work cut out having the desired impact back home. He also has to deal with the immediate problems caused by the actions of four rogue NAB currency traders who lost a fortune betting on a rebound of the US dollar.

Stewart, though, is well regarded in banking circles and could be the right man at the right time. He was head of the Woolwich Building Society when it listed on the stock market for 3.4bn. He subsequently sold the company to Barclays for 5.4bn, and three months later joined NAB as head of European operations.

He studied at Boroughmuir High School in Edinburgh before dropping out of Heriot-Watt University to pursue his interest in scuba diving.

Friends describe him as being "far too interesting" to be a banker and expect him to take full advantage of his new proximity to the Great Barrier Reef as he takes over the helm of NAB in Melbourne.

But scuba diving is unlikely to get a look in for the foreseeable future - and the banking world will watch with interest how much attention is paid to the Clydesdale from his office Down Under.

Since 2001, when the likes of RBS and HBOS saw their fortunes skyrocket, Clydesdale has suffered a 17% drop in profits. Its pre-tax profit slumped from 174m to 161m in the 12 months to September. On a like-for-like basis, which does not include discounted business, profits rose from 143m to 161m. In stark contrast to Clydesdale’s mediocre fortunes, RBS is expected to post a rise in pre-tax profit from 6.4bn to 7bn - a tidy 224 per second - when it reports full year figures this month.

Although Clydesdale is still the third largest bank in Scotland, Lloyds TSB Scotland is rapidly catching up. Both have about one million retail customers, although Clydesdale has a much larger business banking operation.

Even Stewart, who said last week that Clydesdale was "sadly" not an operation that shareholders could be proud of, recognises that NAB’s UK operations have performed poorly.

The consensus is that NAB has completely lost its way by failing to invest in Clydesdale and its other UK banks and that management was guilty of inaction in a fast moving and rapidly consolidating marketplace.

Morgan Stanley, in a research note last week, said: "We think the UK can do better from a cost and revenue perspective. Stewart will work hard both to build confidence in this turnaround and actually deliver."

At the heart of Clydesdale’s problems, according to senior executives at the bank, was a failure to make the most of opportunities to grow the business organically.

Linn Peacock, an executive director of NAB’s European operations, who worked with Stewart at Barclays Bank, admitted that Clydesdale had not done enough to protect its market share. "I don’t think it’s a case of what has gone wrong, it’s more about what hasn’t happened. In recent years we [NAB] have not invested in our business to the same extent as other banks.

"We looked for acquisitions like others in the market and the decision was taken not to invest while we were looking at that opportunity."

But acquisitions have also been conspicuously absent in a UK market that has been consolidating rapidly and left little left apart from a few smaller offerings. NAB was locked in talks to buy Abbey National during 2002 and was also linked to Alliance & Leicester, but landed neither. NAB’s flawed acquisition strategy was not just confined to the UK. It bought and sold Homeside, County and Michigan National in the US and had minority stakes in targets SGB and Australian rival AMP. In the case of Homeside, NAB wrote down the value of the company by 1.5bn.

The flow of equity into these disastrous acquisition activities left NAB’s UK operations starved of capital.

Morgan Stanley analyst Hugh Maxwell-Davis said in his research note on NAB: "M&A is probably the second area of underperformance of NAB. Stewart would be unwise to rule out M&A as a tool for delivering value but could reduce investor concern considerably by de-emphasising it for now and undertaking to deliver organic growth as a first priority."

In Europe, NAB is left with Clydesdale Bank, Yorkshire Bank, Northern Bank and National Irish Bank - four regional companies which lack market leadership in their respective territories and few obvious synergies. The four banks combined made a pre-tax profit of 511m in 2003.

To add to the mix, there is also an NAB branded centre in Edinburgh Plaza which deals with international business customers.

Peacock stressed yesterday that acquisitions would only be considered if they were "an ideal strategic fit" with NAB’s existing UK and Ireland operations. She added that the strategy going forward was to make the most of existing assets, rather than risk repeating the mistakes of the past.

"We cannot do anything about the past, but we do have control of what we do in the future," she says. "We are moving forward and putting investment in place."

The scale of that investment is not being disclosed, but is described as "significant" by Peacock.

It will include an integrated, multi-medium advertising campaign that will kick off later this month. "Essentially it’s about what Clydesdale Bank stands for. We will make it clear why it is distinctive in the marketplace," says Peacock.

For the past year, there have been big changes behind the scenes at Clydesdale. Later this year will see the culmination of those efforts when a streamlining process to merge the back office functions for the four UK and Ireland banks into one operation is completed. Why this has taken 14 years for NAB to implement is a question that still puzzles analysts.

On the high street, the customer should not notice a change. The four UK and Ireland brands will remain in place. But behind the scenes they will operate as a single entity.

"We make everything four times. It’s about removing that duplication," Peacock says. An undisclosed number of jobs will go, but any reduction in headcount is likely to be balanced by an increase in customer-facing roles.

"We see huge value in our brands. We want to get to a situation where we have one seamless back office supporting brands that have a resonance with our customers," Peacock adds.

The extent of cost savings has yet to be disclosed. A new revamped product range will also be unveiled as part of the marketing push.

In addition, Clydesdale will become the legal name of NAB’s UK operations, with Yorkshire Bank a brand within the new "Clydesdale PLC" structure.

Although Peacock describes the move as a legal "tidying up" of NAB’s banking operations in the UK, it also provides an insight into Stewart’s plans for the two banks.

The Clydesdale brand will adorn the majority of new "one-stop" financial services centres being set up across England. Four are in existence already - in Bristol, Liverpool, Reading and Southampton - and four more are being built, with more planned over the medium term.

Peacock says: "Our research shows Clydesdale has a real resonance among our target customers in London and the south-east. The chances are the majority of the new centres will be [branded] Clydesdale."

The new centres are specifically aimed at SME and "premium" retail customers, who Clydesdale believes are fed up being treated like a number by its larger rivals. The centres will provide normal banking services as well as wealth management and other financial services products, such as insurance, under one roof."

David Thorburn, chief operating officer at Clydesdale, says there are advantages in being smaller. "The difference in our offering is quite dramatic. The customer feels like a big fish in a small pond."

Clydesdale’s high street network, which currently stands at 240 branches, will not grow significantly. Across the NAB group in the UK and Ireland the figure is about 700.

Peacock believes that smaller banking players can still successfully "mix it" with financial giants like RBS.

"If you are a big player you have certain advantages. But if you are a medium-sized player of course you can also a success, but you have to play a different game."

That "game" for Clydesdale will be based on providing value-added services to premium customers, while enhancing its "bread and butter" retail product range."

Northern Rock can be cited as an example of a smaller bank, that has carved out a successful niche for itself in a fiercely competitive market.

One analyst, who declined to be named, said yesterday: "There is no fundamental reason why Clydesdale and Yorkshire banks can not make headway in today’s banking market.

"Stewart knows what he is up against and has placed the right focus on the UK. If he does knock NAB’s operations in the UK into shape it will be about bloody time."