New NAB CEO faces challenge of what to do with Yorkshire and Clydesdale Banks

It’s a financial world: New NAB CEO faces challenge of what to do with Yorkshire and Clydesdale Banks

New NAB CEO faces challenge of what to do with Yorkshire and Clydesdale Banks

With
Cameron Clyne leaving National Australia to spend more time with his family,
incoming Group CEO, Andrew Thorburn, will have to face the perennial question
of what to do with the bank’s UK businesses. For many years Yorkshire Bank and
Clydesdale Bank have been seen as albatrosses hanging around the neck of the
incumbent Group CEO of National Australia. With Nab’s focus on growing in their
domestic market and Asia the two banks have long been seen as non-strategic.

During
the financial crisis Nab had to invest nearly £1.5bn of capital into the
business to shore up the balance sheet. There have been challenges with non
performing loans as well as redress for misselling of PPI to add to the woes.
As part of a plan to improve the performance of the business there has been a
significant cost cutting exercise that resulted in the removal of 1,400 jobs and
the closure of 29 banking centres. There has also been a withdrawal from London
and the south of England.
However
for many years both banks have been starved of any significant investment to
improve them and to make them better able to compete in the UK market. It is
not since the Brit John Stewart was Group CEO and fellow Brit Lynne Peacock was
running the UK operations that any significant effort was put into innovation
and growing the businesses in the UK. Indeed large parts of the strategy for
the UK banks set out by Stewart and Peacock were reversed during the cost
cutting exercise. (Recent news that Clydesdale Bank is to issue Britain’s first
plastic £5 note hardly counts as innovation).
Nab
in Melbourne have for a long time been very open about the fact that Yorkshire
Bank and Clydesdale Bank are seen as non-strategic. The market has been sounded
out for interest in acquiring the business. At one point it was rumoured that
Santander was interested in acquiring the business but no deal has emerged. A
key on-going challenge for the Nab Group CEO has been that there has been a
significant gap between the value that the UK operations are held on the
balance sheet and the price potential acquirers are prepared to pay. This
situation has deteriorated even further since the crisis in 2008 with both bank
valuations dropping and the interest in acquiring banks disappearing. For Nab,
either no  Group CEO wanted to take that
write off on their watch or the Board wouldn’t let him.
There
is no doubt that there has been and continues to be a lot of dissatisfaction
from analysts and investors about the financial performance of Nab in its local
domestic market. It is seen as the laggard of the Four Pillars. The challenge
for Andrew Thorburn is to turn around that perception. Whilst the UK operations
are definitely not the highest priority in terms of fixing the business they
are seen both as a distraction and requiring significant capital that could be
better deployed elsewhere.
So
as Andrew Thorburn starts his role as CEO in August 2014, will he do something
to resolve this issue and what are his options for the UK operations?
The
ideal outcome for the new CEO would be to sell the UK operations and minimise
the write off. The question though is who would want to buy them?
On
paper Yorkshire Bank and Clydesdale Bank could be challenger banks. They both
have strong brands with loyal customers. The Yorkshire brand stretches way
beyond the county boundaries. Clydesdale is seen very much as a Scottish bank
and one that has managed to maintain its reputation far better than either Royal
Bank of Scotland or HBoS, its two main rivals. This could make it attractive to
Private Equity firms, for instance JC Flowers might wish to merge it with its
OneSavings Bank. It could also be attractive to other Private Equity firms
looking to establish a foothold in the UK retail banking market. However the
timing for One Savings Bank is not good as they have already announced that
they are to float and that is where their focus in the short term will be.
The
challenge for anyone evaluating Yorkshire and Clydesdale is, apart from their
customer base, what is there of value to acquire? Between the Yorkshire and
Clydesdale they have 322 branches, a very similar number to the branches that
Williams & Glyn (the challenger bank being created from the forced disposal
RBS has to make) will have. However, as is becoming increasingly apparent to
both established and challenger banks, the use of branches by customers is
declining and therefore the value of having an extensive network of branches is
reducing. As both RBS and Lloyds found out finding buyers for their branches
was not easy with both, respectively, Santander and Co-op withdrawing their
offers after long protracted negotiations. The additional challenge with the
Yorkshire and Clydesdale branches is that significant investment by the buyer
would be required to bring the branches up to  a standard customers expect today due to the
lack of investment by Nab over the last few years.
If
a new entrant was looking to acquire the Nab UK operations and they wanted to
initially use the Nab IT platforms then if they wish to be competitive they would
need to invest very heavily over the medium term on new platforms, as the Nab
platforms are old and in need of retiring.
With
a cost income ratio of 76% there is a lot of efficiency gains to be driven out
by the right owner, but the question is the level of investment to achieve this
and over what time period.
Given
the level of investment that any new entrant would need to make in order to use
the UK operations as a platform for competing in the UK retail banking market,
the price that they would be prepared to offer is highly unlikely to meet the
amount sitting on the Nab balance sheet.
Given
Nab’s situation it is easy to understand why a couple of years ago Santander
were rumoured to be interested in acquiring the UK operations. Santander has
its own platform, Partnenon, and has a track record of being able to migrate
bank accounts onto its systems – Abbey National, Alliance & Leicester and
Bradford & Bingley. The challenge for Nab is that Santander is a distress
purchaser and never knowingly overpays.
If
Nab can’t sell Yorkshire and Clydesdale at an acceptable price then what about
a flotation? Timing is a real challenge here as there has never been a time
when more banks are coming onto the market. TSB, Aldermore, OneSavings Bank,William
& Glyn, Virgin Money, Metro and Shawbrook have all announced intentions to
come to the market over the next eighteen months. Investors are spoilt for
choice. Along with the recent disappointing flotations (Saga, JustEat. AO, etc),
albeit in other sectors, there will be a downward pressure on prices and consequently
the amount of capital that will be raised.
Another
option is to do nothing and let the two brands continue to operate as they are
today, continue to reduce costs and improve performance with minimal investment
and allow the business to slowly decline as customers move away to competitors
when they are attracted by better offers.
There
is no immediate need for Andrew Thorburn to make a decision about the future of
the UK operations particularly given the uncertainty with the Scottish
Referendum occurring in September 2014. The UK operations operate under a
Scottish banking licence and a ‘Yes’ vote could create a long period of
uncertainty and have a significant impact on the value of the UK operations.
However
as a new CEO there is a grace period during which there is an opportunity as
the new broom to look with fresh eyes at all the problems. It is an opportunity
to announce write offs, set the bar and expectations low and then over-perform.
Thorburn should take full advantage of this initial period of goodwill to be
quite clear what his plan is for Yorkshire and Clydesdale to end the
uncertainty for customers, colleagues and investors.

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