Moody's downgrade for NAB's British unit
In a review released late last week in Britain, ratings agency Moody's said the 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 ($10.3 billion) commercial property lending book and "NAB's stated intention to sell the bank over the medium term".
Moody's cut Clydesdale Bank's long-term bank deposit and senior debt rating from A2 to Baa2 while cutting from Prime 1 to Prime 2 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 continued losses that required NAB to inject capital as well as transfer £5.6 billion in property debt off the Clydesdale balance sheet.
NAB's intention of offloading the bank "leaves Clydesdale in an uncertain position", it said.
The changes under way following problems with Clydesdale Bank's risk management and governance, which brought about the problems with its property book, will take time to take effect, Moody's warned.
The bank's poor efficiency, as measured by the cost-to-income ratio of 70 per cent, is a prime reason for Clydesdale Bank's low profitability, it said. Cost cutting and redundancies would help to improve its operating efficiency.
"These reductions in footprint and scale of the business, which are being pursued to improve this efficiency, are not without execution risks, however," Moody's warned.
Frequently Asked Questions about this Article…
Moody's downgraded Clydesdale Bank's credit ratings after finding a further deterioration in the asset quality of a key part of its lending business. The agency cited historic failures, weakened risk management and a materially weakened retail and selective business lending franchise. For everyday investors, the downgrade signals increased credit concerns around Clydesdale and highlights underlying problems that could affect the bank's future stability and profitability.
Moody's cut Clydesdale Bank's long-term bank deposit and senior debt rating from A2 to Baa2. It also lowered the short-term rating attached to the bank's deposit and short-term debt from Prime 1 to Prime 2.
Moody's pointed to a deterioration in asset quality in a key lending area, historic failures that required NAB to absorb a large commercial property lending book, past risk-management and control weaknesses, a strategic pull-back from commercial real estate and other business lending that weakened the franchise, and continued losses that necessitated capital injections and asset transfers.
NAB absorbed Clydesdale's £6 billion (about $10.3 billion) commercial property lending book and also transferred around £5.6 billion in property debt off Clydesdale's balance sheet, according to the article.
Moody's highlighted Clydesdale Bank's poor efficiency—its cost-to-income ratio is around 70%—as a key reason for low profitability. The bank is pursuing cost cutting and redundancies to improve operating efficiency, but Moody's warned these measures carry execution risks and that improvements will take time.
Moody's said NAB's intention to sell Clydesdale over the medium term leaves the bank in an uncertain position. The sale plan, combined with the bank's existing problems, contributes to longer-term structural challenges for Clydesdale's franchise and governance.
Moody's downgrade lowered the ratings attached to deposits and short-term debt from Prime 1 to Prime 2 and cut long-term deposit and senior debt ratings to Baa2. That reflects a downgrade in perceived creditworthiness for creditors. The article does not state direct immediate impacts on depositors, but the rating moves signal higher credit risk as assessed by Moody's.
NAB injected capital into Clydesdale and transferred significant property debt off the bank's balance sheet. Clydesdale is also pursuing cost cutting and redundancies to improve efficiency. However, Moody's warned that changes to address risk management, governance and efficiency will take time to take effect and are not without execution risks.
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