'NAB's UK banking franchise was hit in three ways during the year.' Photo: Nic Walker
CAMERON Clyne says he is hanging on to NAB's battered British banking franchise because alternatives - including selling it at a fire-sale price - are worse. But he is only going to be able to maintain that position if the restructuring he has personally presided over in Britain works.
NAB chief financial officer Mark Joiner summarised the problem by noting that NAB had absorbed a $700 million earnings turnaround in parts of its business during the year to post steady cash earnings of $5.4 billion.
NAB boosted total revenue by 3.6 per cent, kept costs on a tight leash and delivered a 12.1 per cent, $113 million lift in personal banking cash earnings and a less durable $431 million, 65 per cent increase in wholesale banking earnings to overcome the $700 million earnings reversal, which flowed mainly from Britain.
Just under $500 million was removed from NAB's result as the UK operation swung from a £183 million ($A283 million) profit in 2010-11 to a loss of £139 million the following year, and NAB's profit was also hurt by a $250 million collective loan provision that the group announced on October 19.
NAB called the provision an economic cycle adjustment, but weak economic conditions in Britain were the main reason the provision was raised.
In the year to September, the British banking unit's own charges for bad and doubtful debts jumped from £335 million to £631 million.
NAB's British banking franchise was hit in three ways during the year, beginning in December last year when its credit rating was cut by three notches, boosting its borrowing costs substantially.
Tight fiscal policy was by then also tipping the British economy back into a recession that ran from the December quarter to the June quarter.
Britain's Office for National Statistics reported last week that the economy had grown by 1 per cent in the September quarter, but that included an Olympics tailwind that will not be repeated, and Clyne was rightly cautious about Britain's prospects when he briefed analysts on the profit result.
The final hit came from NAB's bigger British banking competitors. They cleared their own loan books out this year by conducting property fire sales, forcing prices lower and undermining NAB's UK property loan book.
Clyne has taken on the role of chairman of the British operation, and he has cut the division's funding costs and refocused it on retail customers and small to medium businesses by moving commercial property loans valued at £5.6 billion across to NAB's own, higher-rated balance sheet, where they will run down over time.
He isn't pretending that he is creating a business that he wants to keep. The aim is to get it into good enough shape to hang onto it until someone offers a price that isn't derisory. The light on the hill in that respect is the fact that the British business made £49 million in the second half of the year out of the assets and businesses it is holding onto after the curtailment of its commercial property lending and the transfer of commercial property loans to the parent company.
It still has risk-weighted assets of about $38 billion after that shuffle, however, and would need to be four times as profitable as it was in the September half to match NAB's overall return on assets.
It won't hit that target. Clyne will, however, rate his chances of hanging on for higher earnings and a better exit price if he avoids a repeat of this year.
He certainly needs to avoid a repeat. The $500 million earnings reversal in Britain translates to a value loss of about $5 billion for NAB in the market, given that it trades on a prospective earnings multiple of 10 times. That is more than the British business is worth, or will be for that matter.
Clyne's view is that restructuring costs have been taken, the ratings downgrade has occurred and won't occur again, and that the British business has been freed of its commercial property deadweight, but he will be nervous about the British economy.
It grew in the September quarter, but is only back to where it was a year ago in output terms.
NAB's other Achilles heel is also a latent strength - its market-leading 24.8 per cent share of business lending in this country.
When Clyne took over at the start of 2009 he expected that economic recovery would include an acceleration in business lending, but it has not happened.
Business lending was up by 4.4 per cent in the year to June but then slowed to be up only 3.8 per cent in the year to September. NAB's business banking unit posted 1.5 per cent lower cash earnings as loan growth crawled, and debt provisions edged up.
NAB's business lending market share will magnify its earnings power when companies start borrowing more aggressively.
Until that happens, however, its business lending footprint is a liability: Clyne has stopped trying to predict when business loan demand will lift, which is definitely wise.
The Maiden family owns NAB shares.