'Myriad of options' for BNZ's parent in review of its British banking operations; Status quo not one of them

By Gareth Vaughan

BNZ's parent National Australia Bank (NAB), the only one of the big four Australasian banks with fully fledged British retail banking operations, has launched a strategic review of them in a move that could see it exit the country after 25 years.

NAB chief executive Cameron Clyne told analysts yesterday, after NAB reported an 8% rise in first quarter cash earnings to A$1.4 billion, there was a "myriad of options" on the table for the British review.

"And I wouldn't want to close off people's speculation they'll enjoy in the next couple of months," said Clyne. "What we are committed to is to come back as quickly as possible (no later than its interim results announcement on Thursday May 10). We're not ruling things in or out at this point."

NAB's presence in the British retail banking market predates its 1992, NZ$1.5 billion acquisition of BNZ by five years. NAB bought Scotland's Clydesdale Bank, which was established in Glasgow in 1838, in 1987 and acquired the Leeds-headquartered Yorkshire Bank in 1990. The two provide retail, business and corporate banking services to about 2.7 million customers although around 300 retail branches.

Private equity group Sun Capital and NBNK, a banking venture set up by former Lloyds of London chairman Lord Levene, were both linked with tilts at NAB's British operations last year.

NAB tips capital into Britain, takes it out of NZ

Over the past three years NAB has injected about £1.5 billion of capital into its British operations, in contrast to the NZ$1.1 billion of dividends received from BNZ over the same time period. NAB also topped up British staff pension plans by £130 million last month. As recently as 2010 NAB toyed with expansion in Britain when it kicked the tyres of  318 British Royal Bank of Scotland (RBS) branches that were up for sale.

Clyne said the British review would look at appropriately repositioning NAB's business mix and structure for a changed - read tougher - economic environment and to improve returns.

"The review will assess many options and it's still too early to determine the recommendation," Clyne said. "We can say that retaining the existing business mix and structure will not be an outcome."

Asked about the timing of the review Clyne said it stemmed from NAB now seeing a much longer period of subdued economic growth in Britain with the neighbouring Euro-zone sovereign debt crisis continuing and a 0.2% contraction in British GDP in the December quarter.

"What has become apparent now is that whilst there were signs of (British) recovery over the course of 2011, our view is that now that's likely to be a much longer return," said Clyne.

"The UK is in recession, Europe in a much more prolonged recession. The (banking) market is also somewhat stabilised (because) you've had the mandate of divestments now out of RBS and Lloyds. So you've got a more stable market structure (and) we think now's the right time to review the business and get it on a path to having a better return."

Bad British debts on the rise

In the year to September 30, 2011 NAB's British operations delivered a £65 million, or 55%, rise in cash earnings to £183 million from £118 million the previous year, although its net interest margin fell 1 basis point to 2.33%. However, in its first quarter trading update yesterday NAB said its charge for bad and doubtful British debts rose to 1.27% of gross loans and acceptances on an annualised basis in the quarter from 0.86% for the September 2011 half-year, reflecting deteriorating conditions for customers and a reduction in collateral values

The ratio of 90+ days past due and gross impaired assets to gross loans and acceptances rose to 3.22% at December 31 from 3.12% at September 30.

Meanwhile Mark Joiner, NAB's executive director for finance, said the cost to NAB of the A$7 billion of term wholesale funding raised so far this financial year was approximately 195 basis points over the three month swap rate. This was "substantially higher" than its term weighted average cost at September 30 last year of 124 basis points over swap.  NAB's first quarter net interest margin fell to 2.19% from 2.28% with Clyne attributing 6 basis points of the 9 basis points drop to an increase in cost of funds.

"In terms of funding (in the months ahead) what we are seeing is a lot is going to depend on credit demand," Clyne said. "If credit demand remains weak then that gives us more optionality around the funding profile. We anticipate credit demand being relatively subdued over the next quarter or two."

According to Deutsche Bank analysts, NAB has the highest wholesale funding requirement of the big four Australian banks this year at A$26.6 billion.

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