National Australia Bank’s UK banking exposures might remain a blight on the group’s operations, but at least they are a shrinking blight.
Earlier this year, Cameron Clyne’s last significant act as chief executive was to announce the sale of a $1.1 billion portfolio of non-performing UK commercial property loans to an affiliate of Cerberus Global Investors.
Cerberus must have liked what it bought because today Clyne’s successor, Andrew Thorburn, announced the sale of another $2.3bn of "mainly defaulted, watch and high loan-to-value" loans from the UK commercial real estate portfolio to the US group.
From a destabilising peak of more than $10bn that UK portfolio, which Clyne transferred off the UK bank balance sheet and onto the parent’s, has now been run down to about $1.6bn, with NAB saying that rump comprises mainly strongly performing loans.
The portfolio, created as a result of NAB’s ill-timed expansion surge into the commercial real estate markets in the southern parts of the UK via its "financial solutions centres" in the lead-up to the financial crisis, was heavily provisioned. The initial sale in July released about $230 million of capital and the latest sale is expected to free up another $240m or so.
Because the portfolio was pulled out of the UK banks in 2012, the near-complete exit strategy and de-risking of that aspect of NAB’s UK exposures doesn’t impact the prospects for a more complete exit from the UK.
Thorburn has made it very clear that NAB is going to quit a market in which it has had a presence for nearly three decades. In some respects judgements on his tenure as chief executive will be formed by his ability to make good on that intention. The UK banks and the inability to truncate NAB’s exposure were a continuing and negative asterisk to Clyne’s period as CEO.
While the performance of the banking sector and the market for banking assets in the UK has improved, with a successful float of Lloyds TSB unit and a lengthening queue of prospective bank IPOs, extricating NAB from the UK remains a tricky affair.
Along with the rest of the UK banking sector, NAB has been continuously hit by the need to create 'conduct' provisions related to the miss-selling of financial products in the UK. Even though it most recently added about $850m to its conduct provisions, there is no certainty that will cover its eventual liabilities.
To sell the UK banks, NAB is either going to have to convince a buyer or the market to accept the risk of new liabilities (with implications for the value it might extract) or underwrite that risk itself via guarantees.
Thorburn knows that the market will tolerate a less-than-optimal price for the UK assets just to end the troublesome exposures and allow the strength of the core NAB Australasian franchise to emerge.
He has brought a sense of urgency and change to the start of his period as CEO and knows that he needs to close the UK strand in NAB’s history within the first 12 months or so of his tenure or risk that, like Clyne, he might have to carry the burden of NAB’s UK legacy through his term.
Having successfully managed the commercial property portfolio down to the point where it isn’t material, next year shapes as the year that NAB will finally deliver what the market has long wanted and now expects: a complete withdrawal from domestic banking in the UK.