Recovery hopes for bank's $8b British property assets

Signs of life in the ailing British economy have sparked predictions of an improvement in National Australia Bank's portfolio of troubled UK commercial property assets.

After British banks RBS and Lloyds recently revealed declines in their bad commercial property loans, some analysts are eyeing a recovery in NAB's £5 billion ($8.31 billion) portfolio of British assets - which have been a drag on profits for years.

It comes amid tentative signs the British economy is recovering, with recent figures showing falling rates of unemployment and rising commercial property prices. But the prospects of a dramatic improvement in the short term appear slim, with NAB chief executive Cameron Clyne recently saying economic conditions in Britain remained "challenging" for banks, despite the downturn appearing to have reached a trough.

Like many of its peers, NAB's British arm sought to quarantine itself from bad loans made before the global financial crisis by hiving them off into a "non-core" loan book.

In a note to investors last week, Deutsche Bank analyst James Freeman highlighted that RBS's non-performing loans in its "bad" loan book had fallen by £1.3 billion to £6.9 billion during the first quarter of this year.

Lloyds had also said bad debts in its non-core bank were improving, he noted, suggesting the rate of deterioration in non-performing loans had probably peaked earlier this year.

Citing these trends, and the fact that NAB had been more conservative in its provisioning for bad loans, Mr Freeman said he expected the bank to reveal a "meaningful" reduction in bad debt charges in Britain in the 2014 financial year, which begins in September.

Against the signs of improvement, however, Mr Clyne last month said conditions in Britain remained difficult, as lenders grappled with weak growth and changing regulations.

"It seems to be bumping along the bottom, which was reflected in the first half in that things didn't get any worse," Mr Clyne said in a briefing with journalists.

"But again it's the slowest recovery now since the Great Depression, so it is quite a marked sort of slowdown."

Some experts also remain sceptical about the prospects of an improvement in NAB's British business any time soon.

JP Morgan analyst Scott Manning said that despite progress being made at an aggregate level in Britain, NAB's lending was often concentrated in locations and industries, such as retail, that missed out on the bounce.