THE DISTILLERY: Clyne's cumbersome Clydesdale

Jotters praise Cameron Clyne while bemoaning NAB's struggling UK arm, with some frustrated by David Thodey's lack of detail.

Australia’s business commentators reserve almost universal respect for National Australia Bank chief executive Cameron Clyne. But they still don’t have a particularly good story to tell about his bank.

The UK operations are a drag on NAB’s results and the market simply won’t let them exit Clydesdale Bank and Yorkshire Bank without paying an enormous price for it.

Also in this morning’s edition of The Distillery, Telstra boss David Thodey is keeping relatively quiet about the precise details shaping the company’s evolving structure. However, given recent history, this column believes he has every right to do just that.

But first, The Australian Financial Review’s Chanticleer columnist Tony Boyd says the former rugby player Clyne would be aware of the hospital pass, but he could not have had any real idea of just how much of a lingering problem the bank’s British operations would be.

"Chanticleer would venture that Clyne has received the worst hospital pass in Australian banking since Frank Conroy took over from Stewart Fowler at Westpac Banking Corp in July 1991. Conroy inherited a bank that was about to blow up and report $1.66 billion in half-year losses in May 1992 because of excessive exposure to commercial property. He lasted in the job until December 1992 when new and angry shareholder Kerry Packer convinced the board to dump him. To add insult to injury, the American banker who was appointed by the Westpac board to replace Conroy, Bob Joss, then proceeded to implement the turnaround blueprint prepared by Conroy.”

So why stay in the UK? Fairfax’s Malcolm Maiden explains that NAB is holding on to Clydesdale because there simply isn’t a cost-effective alternative.

"But he is only going to be able to maintain that position if the restructuring he has personally presided over in Britain works. NAB chief financial officer Mark Joiner summarised the problem by noting that NAB had absorbed a $700 million earnings turnaround in parts of its business during the year to post steady cash earnings of $5.4 billion. NAB boosted total revenue by 3.6 per cent, kept costs on a tight leash and delivered a 12.1 per cent, $113 million lift in personal banking cash earnings and a less durable $431 million, 65 per cent increase in wholesale banking earnings to overcome the $700 million earnings reversal, which flowed mainly from Britain. Just under $500 million was removed from NAB's result as the UK operation swung from a £183 million ($283 million) profit in 2010-11 to a loss of £139 million the following year, and NAB's profit was also hurt by a $250 million collective loan provision that the group announced on October 19. NAB called the provision an economic cycle adjustment, but weak economic conditions in Britain were the main reason the provision was raised.”

The Australian’s Richard Gluyas imagines that Clyne cannot wait for the day that he can visit the motherland as a tourist, rather than a frustrated CEO.

"It's no use highlighting, as he did yesterday, that the ‘core franchise’ (with Britain carved out) is performing strongly, with 14 per cent compound growth in cash profit over the last three years. Return on equity (ROE), excluding last year's $700 million of British ‘troubles’, would also have been 17.2 per cent – at the industry's top-end. No sooner does Clyne make his excuses than the market reverses Clydesdale's disappearing act. ROE slumps to 14.2 per cent, and the focus switches to the gap between cash profit and net profit, with the latter figure incorporating NAB's long history of one-off losses.”

Fairfax’s Adele Ferguson writes that NAB has underperformed its rivals for more than decade "in terms of total returns to shareholders fund and return on equity”. The Australian Financial Review’s Andrew Cornell points out there are in fact a number of measures on which NAB is a terrific bank, but the UK operations continue to drag.

"Any bank going to the market with the highest customer satisfaction ratings ever for one of the big four, solid market share gains, underlying profit growth and a history of stable management should have a good story to tell. But National Australia Bank also has the United Kingdom. Moreover it has a reputation for confusing accounting, which the current stable of management has not managed to shrug off. The result is while the consensus is NAB shares are cheap, they are not cheap enough to offset the ongoing carnage offshore and the nagging anxiety surprises will continue to turn up in the accounts.”

The other big corporate story from yesterday was of course Telstra’s Investor Day presentation. Fairfax’s Elizabeth Knight says the telco had some positive things to tell its shareholders, but couldn’t deliver too many real specifics.

"Telstra’s David Thodey tantalised investors with passing reference to a few potential areas for growth but was frustratingly short on new detail. He made passing reference to Telstra being the preferred tenderer for a massive (multibillion-dollar) Australian defence communications contract but gave no detail on the time frame and what contribution it would make to revenue or profit. This is clearly a positive, but without any numbers, just how positive is impossible to tell.”

The Australian’s John Durie similarly noted that Thodey was "typically cautious” about the details surrounding the defence deal.

"But the key is it highlights the growth options around network application services. NAS, as it is called, is a key new growth opportunity for the company, with the domestic market tipped to grow to about $11.2 billion in 2015 from $6.6 billion in 2010. It is a relatively low-margin business and, particularly offshore, is also highly competitive. The battle round is similar to the banks, with most of the big bank oligopoly keen to follow its clients offshore and perhaps pick up business on the side in someone else's backyard. That's the game Telstra is playing. As part of this strategy, the company said it was expanding its reach with the launch of nine new points of presence in London, Marseille, Stockholm, Osaka, Tokyo, Sydney, Hong Kong and Chicago to satisfy increasing connectivity demands between key global markets. Riley noted in Chicago that the company provided services to high-frequency trader customers, which now dominate US stockmarkets.”

That’s some solid analysis from Durie. And it should be said that Thodey is well within his right to play his cards close to his chest. We’ve been quick to forget that it’s only recently in Thodey’s tenure as CEO, which began in may 2009, that he hasn’t had to remain very guarded about a possible deal with government – that being over the National Broadband Network.

Meanwhile, at long last The Australian’s Asia Pacific editor Rowan Callick has got a copy of the Australia in the Asian Century white paper – he’s been waiting for this document for months.

"The Asia white paper deserves some ticks. It focuses on some very real challenges. It has a vision of the space Australia should occupy by 2025, with which few in public life would disagree – smart, strong, materially and culturally rich. It fits the usual core requirement of politicians, in not containing surprises. It doesn't, mostly, need people to change overall direction, just to step on the gas. It avoids the danger of taking China, central as that relationship is, as a proxy for Asia as a whole.”

Elsewhere, The Australian’s economics editor David Uren points out that the Business Tax Working Group could have come up with a proposal to slash the company tax rate from 30 per cent to 20 per cent without impacting total government revenue if dividend imputation had been put on the table.

The Australian Financial Review’s Matthew Stevens argues that the concern Arrium had for the tenuous state of financing for the Steelmakers Australia bid was a bit of a stretch. With Noble Group and POSCO participating, they’d find a way to get the cash quickly.

And finally, The Australian’s Robin Bromby encourages Europe to look into shale gas.

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