MARKETS SPECTATOR: Clyne still faces a cumbersome Clydesdale

Despite very strong first-half earnings, NAB's UK operations remain a major headache for Cameron Clyne.

Australia’s biggest bank has reported a 23 per cent jump in its half-year net profit to $2.52 billion. No doubt the stock will react positively, especially as the fully-franked 93 cents per share dividend is up three cents, adding further conviction to those betting on bank shares and their yield. But NAB’s much maligned UK unit, Clydesdale Bank, continues to be a headache.

NAB’s UK banking unit report cash earnings of £41 million. But that was simply a result of the transfer off Clydesdale’s books of NAB’s UK commercial property business. Charges for bad and doubtful debts in the UK were £185 million and that, NAB says, reflects “ongoing economic pressure on distressed assets and falling property values”.

Clydesdale’s cost to income ratio is a staggering 70 per cent. Last March it was 59 per cent. Clearly, Clydesdale can be run more efficiently. In comparison, NAB’s New Zealand banking business has a cost to income ratio of 40 per cent.

Clydesdale is just one half of NAB chief executive Cameron Clyne’s UK headache. NAB’s UK commercial property business had a loss of £149 million after sales whittled away the value of such assets to £5 billion in March from £5.6 billion in October 2012. But while Clyne would dearly love the UK problems to go away, that is unlikely to happen soon. The UK is in the grip of a prolonged recession. No buyer may emerge for quite some time offering a price for Clydesdale the NAB chief can justify to his board and investors.

Clyne is not keen on foreign adventures. He may be quite happy to offload his US unit, Great Western Bank, which made paltry cash earnings of $US55 million in the six months to March. And Asia does not excite Clyne as much as some. “NAB’s Australia in Asia strategy is focused on supporting trade and investment flows,” the bank says. With a slip in NAB’s cash return on equity to 14.7 per cent, compared with 15 per cent in March 2012, Clyne will be seeking to rid himself of troublesome assets and clear away yet more costs to boost the bottom line.