Credit rating downgrade for NAB's Clydesdale

NAB's British unit Clydesdale Bank has been hit by a downgrade of its credit rating after another deterioration in the asset quality of a key part of its lending business.

In a review released late last week in Britain, ratings agency Moody's said the UK bank "faces longer term structural challenges from its weakened franchise and past risk-management/control weaknesses".

The downgrade also highlighted "historic failures" that led to NAB absorbing Clydesdale's £6 billion ($10.4 billion) commercial property lending book and "NAB's stated intention to sell the bank".

Moody's cut Clydesdale's long-term bank deposit and senior debt rating to Baa2 from A2 while cutting to Prime 2 from Prime 1 the rating attached to the bank's deposit and short-term debt.

"The bank's franchise as a retail and selective business lender has been materially weakened, following a strategic pull-back from commercial real estate lending and other areas of business lending," Moody's said.

This followed more losses at the British unit that required NAB to inject capital into its unit as well as transfer £5.6 billion in property debt off the Clydesdale balance sheet. NAB's ultimate intention of offloading the bank "leaves Clydesdale in an uncertain position", it said.

The changes under way, following problems with Clydesdale's risk management and governance, which brought about the problems with its property book, would need time to take effect, Moody's warned.

"The bank remains exposed to ongoing short-term pressures," Moody's said, including "a business loan portfolio whose asset quality remains under pressure and low profitability, which reduces the bank's financial flexibility".

"The business loan portfolio, excluding [commercial property], has continued to deteriorate in the six months to March 2013 (gross impaired assets increased 30 per cent over the period), as increases in arrears and gross impairments highlight, despite a stabilisation of the broader UK economy."

Clydesdale's low profitability worked to reduce the bank's financial flexibility to absorb ongoing provisions for bad debts, write-offs and further provisions for "conduct-related matters", the agency said.

The bank's poor efficiency, as measured by the cost-to-income ratio, which stood at 70 per cent, was a prime reason for Clydesdale's low profitability, it said.

Cost cutting and redundancies would help improve efficiency over the medium term.