Clyne takes a chance

Over the New Year period I decided to set out the challenges for 2010 that are facing seven people – the American President and six Australians, Kevin Rudd, Tony Abbott, Glenn Stevens, Cameron Clyne , Marius Kloppers, and David Thodey.

We should have all picked what would happen to National Australia Bank with the combination of former Wesfarmers CEO Michael Chaney as chairman and Cameron Clyne as CEO – that there would be a great volley of takeover activity. The most recent of these moves was revealed over the weekend, with news that NAB is attempting to buy out nationalised British bank Northern Rock.

But the volley of acquisitions has exceeded all expectations and NAB, having secured the Aviva group and JBWere, has gone on to make a bid for AXA in Australia. Clyne faced a major management challenge in integrating Aviva and JBWere into his wealth management network.

If he succeeds with the AXA acquisition it will be an enormous management task and that management task will be superimposed on a financial planning industry that is undergoing enormous changes in how it charges for services.

In the past, fees have been based on commissions usually tied to assets. Now fees will be calculated on an hourly basis. Clyne seems to have agreed with AMP chief executive Craig Dunn that this change will mean that the superannuation industry will be divided into two segments – low-cost plain-vanilla products that attract low fees, and a set of higher-cost products that offer greater choice. Advisory groups will tend to specialise in one market or the other. Dunn has based AMP's future around this strategy and the AXA acquisition would have enhanced it, but was not essential. It seems that Clyne has a similar view and needs to establish scale to pursue the lower-cost leg of the market against the AMP and the industry funds.

If Clyne can pull off the AXA takeover and achieve the cost economies without destroying existing customer bases, then NAB will emerge as a wealth management product powerhouse.

Add that to its business banking operation and the group will have a very different future to the one that people expected a year ago. Clyne has taken the opportunity of the Westpac mortgage interest rate hike to hold back NAB mortgage rates and try to gain both mortgage market share and community goodwill (which will be important in holding wealth management market share).

In the UK, there is going to be substantial rationalisations in banking – and Clyne needs to decide whether NAB is a buyer or seller. It is possible that he might be a buyer because in Lynne Peacock he has an excellent executive who is capable of managing a wider banking portfolio.

In the past, NAB has often stumbled when it undertook major acquisitions – and as a result, the market has rated the bank's shares below those of Westpac and the Commonwealth. If Clyne can pull off these acquisitions and actually manage them, NAB will be substantially re-rated in the market. But if he fails, the bank will be damaged for a long time.

But there is another aspect of NAB that may challenge Clyne in 2010. Around the world, giant banks are making a fortune borrowing at low US interest rates and then punting by lending to higher risk borrowers that are often governments. NAB has played a variation of this game before, and lost, but seems to be playing it again. This time, according to George Lekakis of the Herald Sun, $12.8 billion in NAB loans are secured by the Italian government. European governments are under pressure and the sovereign government loan market that could easily blow up in 2010 or 2011. If NAB is caught again, shareholders will not be forgiving.