Storm-tossed NAB hands the rudder to a cautious captain

Clyne will not be alone in pursuing a minimalist strategy. It is already being unrolled by the big banks as they prepare for the economic downturn being squeezed out of the credit and sharemarket crunch.

Yesterday's revelation that credit growth is stalling and retail sales weakening was the strongest sign yet that interest rate rises and price hikes for energy and other household and business costs have tipped the Australian economy over.

If it were not for the commodity boom that is pulling in income and fuelling investment in the resources-rich north and west of the country, a recession would be on the cards.

In such an environment, Clyne outshone NAB's Australian boss, Ahmed Fahour, his main contender to replace John Stewart, who was on a yearly contract rollover. Clyne is considered a more inclusive leader than Fahour, and a less aggressive one.

Those attributes gave him an edge that became progressively more telling this year, as the credit crisis deepened.

Boring is the new black in banking, and Clyne's success in the medium term will be judged not on what he does but on what he is not forced to do.

He needs last Friday's news that NAB was adding another $830 million to its loss provision on US mortgage debt derivative conduit exposure to be the low point in the crisis for the bank and its shares.

Stewart was appointed in February 2004 as the bank tried to mend risk management and governance holes exposed by the discovery of $360 million of hidden foreign exchange trading losses. He asserted yesterday that the latest provisions did not indicate that the fixes had failed. NAB had control and compliance problems "coming out of its ears" in 2004, as well as stalled revenue, spiralling costs and declining customer satisfaction. It was not a case of taking the risk out, he said, but of taking risk and pricing it properly. One of the short-term tasks in the changeover period - which will see Clyne become chief executive-designate on October 1 and work with Stewart until January 1 - is to reassure investors that what Stewart said was correct.

NAB's shares are just under 45 per cent below their high in mid-November last year - worse than Westpac and CBA, which are down 30.6 and 35.5 per cent respectively from highs reached on November 1, and only slightly behind the accident-prone ANZ, which is 48.5 per cent below its October 11 peak last year.

Stewart said yesterday that this reflected the fact that NAB is the most international of the Big Four banks, through its ownership of Clydesdale Bank and Yorkshire Bank in Britain and Great Western rural bank in South Dakota.

But it also reflects investor uncertainty, not so much about whether NAB is hiding the extent of its exposure to the crisis but about whether the judgment calls NAB is making about its exposure are reliable.

Scepticism surfaced last Friday, when Stewart briefed analysts about the decision to massively hoist the provisioning for losses on conduit exposure to derivatives called collateralised debt obligations (CDOs) ultimately backed by US mortgages.

By writing down 90 per cent of the value of the CDO conduit exposure, NAB sterilised the CDO position. But it has another $4.5 billion of conduit exposure to corporate assets including real estate - and Stewart and the chief financial officer, Mark Joiner, failed to give enough detail about it to satisfy the analysts. Clyne and Stewart need to find ways to give investors more clarity and comfort about the exposure.

Longer term, it will be a case of battening down: yesterday's news that private-sector credit expanded by only 0.4 per cent in June, to be up 11.7 per cent in a year, combined with weak retail numbers to confirm that rate rises and fuel price increases have dimmed Australia's bulb.

Credit growth is now running at half the rate it was in the boom, and defaults on credit already extended by the banks are increasing. With the markets also pulverising investment returns on managed funds, the banks are entering an unavoidable earnings recession. Clyne's job is to steer NAB cautiously, and lead a bank that gets hurt less than its peers, or, at the worst, is hurt no more than them.

mmaiden@theage.com.au

The Maiden family owns NAB shares.