Moody's downgrade for NAB's British unit

NAB's British unit, Clydesdale Bank, has been hit by a downgrade of its credit rating following a further 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 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.