Clydesdale to get tough on lending after review by Australian owner

CLYDESDALE Bank will take a tougher approach to lending in struggling sectors such as commercial property and hospitality as it undergoes a root and branch review by its Australian parent.

Lower returns from business lending is thought to be the main driver of the decline in margins and earnings reported last week by Clydesdale, which is fighting to boost its performance amid speculation that National Australia Bank may sell it.

Glasgow-headquartered Clydesdale, which includes the operations of Yorkshire Bank, is expected to undertake a sector-by-sector review of business lending as part of its strategic overhaul.

Any squeeze on lending could have serious implications for economic recovery, particularly in the west of Scotland, say those familiar with Clydesdale’s operations.

Robert Webb, senior financial lecturer at Glasgow Caledonian University, who follows the bank closely, estimates that Clydesdale accounts for between 15 and 20 per cent of all lending to Scottish SMEs. “Melbourne [where NAB is headquartered] has looked at these business lines and is not happy with the returns it is getting on them,” he said. “Clydesdale is a very well-run normal bank, but it is not an exciting entity, so if you’re an Australian shareholder you have to wonder what the incentive is to hold on to these assets.”

Australia’s stockbroking corp unleashed a blizzard of downgrades following Tuesday’s quarterly trading update by NAB chief executive Cameron Clyne.

There seems little doubt Down Under that NAB should be shot of the UK business, which posted cash earnings on assets of 0.41 per cent for the year to the end of September. Such figures have been scorned as anaemic against average group returns of more than 15 per cent for NAB as a whole.

Clyne refused last week to rule out a possible disposal, but also hedged his bets by telling journalists that “the nature of our support for Clydesdale Bank is unchanged”.

Others are less convinced. Back in September, when NAB discussed the possibility of selling Clydesdale to either NBNK or Sun Capital, Moody’s noted a reduction in “the likelihood of parental support” before becoming the first of the credit ratings agencies to downgrade Clydesdale.

Either way, some radical overhaul lies ahead for the business. Conceding last week that the bank’s returns were “unacceptable”, Clydesdale chief executive David Thorburn hinted heavily that commercial lending would come under the closest scrutiny.

“The economics of business banking in its broadest sense have become quite challenging since the credit crunch,” he told one journalist, adding that the surge in charges on bad loans to 1.27 per cent during the last quarter was mainly linked to commercial property lending.

Despite that increase, Clydesdale’s ratio of bad debts to gross loans still looks reasonable against its UK peers, with latest published figures from all the banks varying from Barclays at 0.44 per cent up to Lloyds at 1.61 per cent.

Clydesdale is also within the range of its peer group on other key performance indicators such as cost to income ratio, which measures total operating expenses as a percentage of total income. As of September, Clydesdale stood at 57.7 per cent, compared to less favourable figures in the mid to upper sixties for the likes of RBS and Barclays.

However, the current trend within the industry is towards driving that figure down to nearer 40 per cent. This would require job cuts among Clydesdale’s 8,300 employees, more than half of whom are in Scotland, including 2,500 jobs in Glasgow and Clydebank.

With Thorburn far more positive on the economics of retail banking, it would seem that the 152 Clydesdale branches and Yorkshire’s 185-strong branch network are reasonably safe. Less certain is the future of those in business banking, who are thought to make up about half of Clydesdale’s employees.

With Prime Minister David Cameron trying desperately to financially lubricate the economy through Project Merlin, moves to back away from this sector by even a relatively small player will attract attention.

“But imagine the outcry if Barclays or anybody else of that sort of size said they were going to withdraw from a particular area like business banking,” Webb added.

“Clydesdale will be the first, but all the others will have to look at this as well.”