NAB bets big on the Drummond effect

Craig Drummond's appointment should ease market concerns about National Australia Bank's direction, but it will create a volatile environment for chief Cameron Clyne.

The most striking aspect of the announcement that National Australia Bank has recruited Craig Drummond from Bank of America Merrill Lynch is the $6.5 million "golden handshake" to compensate him for foregone incentives at his former employer.

That kind of money (paid in cash and shares) signals how keen NAB was to prise Drummond out of his role as chief executive and country head for BofA Merrill Lynch and appoint him its group executive for finance and strategy.

Drummond was targeted after NAB conducted an international search to find a replacement for its former head of finance, Mark Joiner, who earlier this year announced he would leave the bank later this year. His departure was foreshadowed in the midst of a major management reshuffle and restructuring that took effect in April as part of Cameron Clyne’s drive to simplify his group and centralise its support functions. Drummond’s ongoing remuneration will be the same as that received by Joiner.

While there is no suggestion that Clyne’s 4½ year tenure as chief executive of NAB is likely to end imminently (despite continuing market reservations about NAB’s performance during that period) it is obvious from the price NAB was prepared to pay to get him that Drummond will be one piece of NAB’s succession strategy.

There are others – Joseph Healy, Lisa Gray, Gavin Slater, Andrew Hagger and Andrew Thorburn are the names most often cited as future contenders – but Drummond’s experience as chief executive of a sizeable financial services business, his hands-on experience of integrating different types of financial services businesses and his reputation for being able to assemble and manage talented people make him a very viable candidate.

He is also a former chief executive of Goldman Sachs JB Were and is both very well-known and very well-respected within the business community and financial markets for his role in transforming that business from its roots as a stockbroking business into a major investment bank. Interestingly, given his new role, he first came to attention as a banking analyst within the old JB Were. He was regarded as one of the best banking analysts in the country at the time, before he became head of research and then moved into senior business management roles.

The appointment will probably fan the flames of speculation around Clyne, who tends to carry the blame for legacy decisions and problems that he inherited.

The big drag on NAB’s performance – indeed the issue that has disfigured NAB’s results and performance since he was appointed in early 2009 – has been NAB’s UK business, which was swamped by the tide of the global financial crisis and its impact on the UK commercial property sector.

Clyne looked at exploiting the post-GFC conditions to build the UK business and also at exiting the UK, neither which turned out to be realistic or sensible options in the recessed UK economy and amidst the trauma the crisis inflicted on the UK banking system generally.

The UK commercial real estate portfolio has now been quarantined from the rest of NAB and is in run-off, with a decision on whether to retain a UK presence deferred until there is sufficient stability in the economy and sector to enable an informed decision and some viable options.

The rest of NAB is in reasonable shape and, if the UK impacts could be excised, NAB’s performance would be comparable to its peers. During Clyne’s tenure NAB’s sector-lagging personal bank has been turned around by the “Breaking Up’’ strategy and grabbed market share and lifted perceptions and the core business bank has maintained its leadership position. There has also been solid cost control.

For whatever reason, however, Clyne has never generated much enthusiasm within the market and there has been continual speculation about his future despite the public support of his chairman, Michael Chaney.

The appointment of Drummond, because of his long-standing involvement in the markets and relationships with institutions and analysts, could be a circuit-breaker for NAB and Clyne. He has credibility and respect in the market and is also well-liked, so giving him responsibility for the key finance and strategy roles ought to help the group’s relationships with the market-at-large.