As NAB starts with a Clyne slate, judge him on what he is not forced to do
The bank's next chief executive has to make sure it gets hurt no more than its peers.
The bank's next chief executive has to make sure it gets hurt no more than its peers. CAMERON Clyne is a man for the times. His job as the next chief executive of National Australia Bank will be to trim the group's sails: risk tolerance will be dialled down, and while he theoretically begins with a clean slate, NAB chairman Michael Chaney effectively confirmed yesterday that acquisitions were off the agenda unless they presented totally compelling return on investment calculations.Clyne won't be alone in pursuing a minimalist strategy. It is already being unrolled by the big banks, as they prepare the economic downturn that is being squeezed out of the credit and sharemarket crunch.Yesterday's revelation that credit growth is stalling and retail sales weakening was the strongest sign that interest rate rises and price hikes for energy and other household and business costs have tipped the Australian economy over.It is now a question of when the Reserve Bank starts to lower interest rates, not if. Even if there is a rate cut before Christmas, as looks increasingly likely, Australia is set for a year or more of sub-par growth: if it were not for the commodity boom that is pulling in income and fuelling investment in the resources-rich north and west of the country, a recession would be on the cards.In that environment, Clyne outshone Ahmed Fahour, NAB's Australian boss, who was the other main contender to replace John Stewart, who was on a yearly rollover contract. Clyne is considered a more inclusive leader than Fahour, and a less aggressive one, both in his relations inside NAB and in an operational sense.Those attributes gave him an edge that became progressively more telling this year, as the credit crisis deepened, and retail and investment banks that had dined out on derivative debt began to feel post-prandial pain.Boring is the new black in banking and, fairly or unfairly, Clyne's success in the medium term will be judged not on what he does, but on what he is not forced to do.He needs last Friday's news that NAB was adding another $830 million to its loss provision on US mortgage debt derivative conduit exposure to boost the provision to 90% of the $1.2 billion face value of the conduit line to be the low point in the crisis, for the bank, and its shares.Stewart was appointed in February 2004 as the bank tried to mend risk management and governance holes exposed by the discovery of $360 million of hidden foreign exchange trading losses. Until losses began to mount in this crisis, opinion was unanimous that he had worked well with the previous chairman, Graham Kraehe, and then Chaney, who took the role in September 2005, to fix NAB's systems and methods.He asserted yesterday that the latest provisions did not indicate that the fixes had failed, adding that NAB had control and compliance problems "coming out of its ears" in 2004, as well as stalled revenue, spiralling costs and declining customer satisfaction.It was not a case of taking the risk out, he said, but of taking risk, and pricing it properly: one of the short-term tasks in the changeover period that will see Clyne become CEO-designate on October 1 and work with Stewart until January 1 is to reassure investors that what Stewart said was correct.NAB's shares are just under 45% below their high in mid-November last year, worse than Westpac and CBA, which are down 30.6% and 35.5% respectively from highs reached on November 1, and only slightly behind the accident-prone ANZ, which is 48.5% below its October 11, 2007, peak.Stewart said yesterday that this reflected the fact that NAB was the most international of the Big Four banks, through its ownership of Clydesdale Bank and Yorkshire Bank in Britain, and, since the end of last year, the small Great Western rural bank in South Dakota.But it also reflects investor uncertainty, not so much about whether NAB is hiding the extent of its exposure to the crisis - as Chaney pointed out yesterday, it is the board's duty to provide for future outcomes to the best of its ability - but about whether the judgement calls NAB is making about its exposure are reliable.Scepticism surfaced last Friday, when Stewart briefed bank analysts about the decision to increase the provisioning for losses on conduit exposure to derivatives called collateralised debt obligations (CDOs) that are ultimately backed by US mortgages.By writing down 90% of the value of the CDO conduit exposure, NAB sterilised the CDO position. But it has another $4.5 billion of conduit exposure to corporate assets including real estate - and Stewart and chief financial officer Mark Joiner failed to give enough detail about it to satisfy the analysts. Clyne and Stewart need to find ways to give investors more clarity and comfort about the exposure.Another question is whether Clyne's appointment after an 18-month winnowing process results in the departure of some of those who also could have been CEO, notably Fahour, who joined NAB from Citigroup in October 2004, and was considered until this year to be the likely successor.Longer term, it will be a case of battening down: yesterday's news that private-sector credit expanded by only 0.4% in June to be up 11.7% in a year combined with weak retail numbers to confirm that rate rises and fuel price hikes have dimmed Australia's bulb.Credit growth is running at half the rate it was in the boom, and defaults on credit already extended by the banks are increasing. With the markets pulverising investment returns on managed funds, the banks are entering an unavoidable earnings recession. Clyne's job is to lead a bank that gets hurt less than its peers, or, at the worst, gets hurt no more than them.The Maiden family owns NAB shares.mmaiden@theage.com.au
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