Cameron Clyne's efforts to turn around NAB are paying off, writes Clancy Yeates.
This time last year, National Australia Bank boss Cameron Clyne was in the hot seat.
Investor frustration was building after a 22 per cent decline in annual profits backed up a perception the bank had a knack for springing unpleasant surprises. By December the anger had boiled over, with more than one in five shareholders voting against the remuneration report at the annual general meeting - a rare rebuke for a big bank.
Fast forward to today and the outlook for the country's fourth biggest lender is looking more positive, amid signs its long-struggling British business may have put the worst behind it.
In an interview with Weekend Business after the bank this week posted 9 per cent growth in full-year profit, to $5.94 billion, Clyne concedes there was a "bit of a market sentiment issue last year". But he said that "solid" results since then show it is getting on with the job of lifting returns. Moreover, he appears increasingly confident the bank can lift profits further next year as the long-suffering British economy picks itself up from the floor.
"The UK is a legacy matter and I think we've just got to work our way through it," he says.
"If you've got a more buoyant economy then clearly what you've got is more economic activity, profitability improves, loan losses go down, more people are looking at the UK as a market to expand, so I think you've just got a whole series of things that are open to you."
Since Clyne was put in the the top job at the peak of the global financial crisis in 2008, NAB's troubled British business has been a consistent drag on profits and a weight on its share price. Coupled with the bank's exposure to toxic debt during the financial crisis, the British experience has helped make NAB the clear underperformer among its peers over five or 10 years.
Now, Britain is much less of a drag, as the economy finally recovers from a crippling recession. Nonetheless, Clyne concedes there is still more work to be done to improve shareholder returns. This is an area where the bank still lags its rivals, the Commonwealth Bank, ANZ and Westpac.
"We would like to be the bank that's providing the best return to shareholders. That has been obviously an Achilles heel for us," he says. "But pleasingly we've had strong [total shareholder return] over this year and we're not the laggard over three years now. I don't declare victory by any means on that because there's a lot more work to be done."
Unlike its rivals, NAB's share price high this year, at $35.60, is still well below the record of $44.84 touched in 2007. But after a sector-leading 43 per cent gain in the stock over the past year, several broking analysts are also more bullish on NAB. Macquarie's Mike Wiblin predicts profit growth in the double-digits for next year on the basis that its vast business banking arm will benefit from a lift in corporate borrowing.
"NAB is still the cheapest of the banks despite the sources of discount, namely the UK and Aussie impairment getting better," says Wiblin, who has a buy rating on the stock.
Not all are so positive. UBS analyst Jonathan Mott points out that profit before provisions for bad loans has now been flat for seven quarters. And for all the talk of a bounce in corporate borrowing, lending to business is virtually flat, growing by just 1 per cent a year.
NAB also remains a long way from its former glory in the mid-1990s, when it was the largest of the big four by market capitalisation.
But Clyne, a towering former rugby player, argues size is not the right gauge of performance. Indeed he says it is still possible to be the best when you're the smallest of the majors, as NAB is today. "I don't focus on size, because I think that can lead you down to a situation where pursuing that is your sole goal, as opposed to saying well it might be fine to be fourth in terms of size if you're also delivering superior returns to shareholders and also superior offerings your customers."
Earlier this year, speculation erupted over who may replace Clyne as the next boss of NAB when it hired investment banker Craig Drummond as its next finance chief.
Clyne won't talk about how much longer he may spend in the role, but he does nominate what he sees the key benchmarks for success in his time leading the bank. First, he wants to make the bank stronger than it was when he started. Second, he wants to neutralise those "legacy issues" - which have also included exposure to toxic subprime debt and inadequate spending in technology.
"I think on both those topics, if I was to finish tomorrow, I feel we've had success on both fronts," Clyne says. "There's no question that this bank is immeasurably stronger on just about every metric than it was five years ago."
Despite perceptions of being the laggard, Clyne also points out that if Britain is excluded, its return on equity is 17.4 per cent, better than many rivals. This is largely academic for many shareholders, of course.
But Clyne argues these high returns from its domestic operations show its main business is indeed "firing on all cylinders", at a time when the outlook for its British arm is also more promising.
"There's a lot of things you don't control. Obviously a very material driver for us is the UK. But I just go back to saying this bank is stronger than it was five years ago, it will be stronger tomorrow than it was today ... and we're not adding to the legacy, we're strengthening the franchise," he says.
"So I'm quite relaxed that whatever time frame it is that I'm no longer CEO, as long as the bank's stronger than it was when I started, that's fine."