Thorburn's NAB clean-up needs lots of work

National Australia Bank's Andrew Thorburn has been in the top job just three months but the sense of urgency with which he's trying to clean up the mess is, if anything, picking up pace.

Announcing the banking giant's full-year results today, Thorburn left no doubt that his top priority is still to offload its troubled UK legacy assets, though he's steadfastly refusing to give any indication of timing. The bank's attention will shift to the core operations in Australia and New Zealand, with a focus on the areas in which it has a competitive advantage. It will also try to claw back some of the market share in its business banking division.

Shareholders are keen to see the back of the UK as soon as possible -- especially since it was responsible for the near 10 per cent fall in 2014 earnings -- but they may have to wait a while, since Thorburn is unlikely to offload it for a pittance. He thinks it's worth a decent amount, and he'll hold off until the price is right.

The Clydesdale and Yorkshire banking operations are in better shape today than they have been in a long time, with improved asset quality and capital levels. A large part of that is due to the improvement in UK economic and market conditions.

But that improvement is still fragile, and developments in the eurozone are a continuing threat, not to mention the potential volatility a rate rise could bring. Any ructions in the UK market could pose a problem for an exit.

The bank is exploring a range of options on how best to offload its UK assets, but will likely go down the route of an initial public offering. It follows a partial float of its US Great Western Bank business earlier this month, which was fairly well received, although the timing was less than perfect, meaning it had to be priced lower than expected. NAB will want to avoid a repeat performance when listing the UK business. But there's already dark clouds forming in the UK market. Indeed, two banks, Aldermore and Virgin Money, were forced to pull their plans to list in London in recent weeks due to market volatility.

Another potential sticking point for exiting the UK market is the impact of conduct charge provisions. The UK regulator is currently conducting an enforcement process in relation to payment protection insurance mis-selling, and disciplinary action could follow. This is an industry-wide investigation, and includes Clydesdale and Yorkshire banks, so it will be very difficult for NAB to exit the UK until the issues are resolved. Again, NAB gave no indication of how long that might take.

To underscore just how much of a drag the overseas operations are, NAB separated out the return on equity for its different geographies and divisions. While the overall ROE fell slightly to 11.2 per cent in FY14, ROE for Australian and New Zealand banking operations and the bank's wealth division was 17.2 per cent, just below Commonwealth Bank's ROE and above Westpac's. This shows the leverage the bank has, and if it can exit the UK any time soon the stock should be re-rated higher, according to Morningstar banking analyst David Ellis.

Any capital NAB can pull out of the UK will be ploughed back into the local operations as it plays catch-up with the other big banks. NAB is still lagging its peers on a number of metrics, including the previously mentioned return on equity, but Thorburn is a man who likes a challenge, and he's determined to get the bank back on track.

He has made it very clear that his focus is on increasing returns to shareholders, and getting rid of the Clydesdale and Yorkshire banks will be a major step in achieving this. Dumping the UK business means it can invest in and refocus on the core areas where it has a competitive advantage, including home lending, lending to small to medium enterprises, agribusiness and health.

And anyone hoping for more clarity on a potential sale of the wealth division will have been sorely disappointed. There was no indication that the bank plans to offload the wealth operations, with both Thorburn and finance and strategy group executive Craig Drummond saying they were an essential part of the business. The bank posted a 13 per cent increase in cash earnings from that division for the year, although compared to CBA and Westpac it is still underperforming. 

Thorburn has his work cut out to get NAB back to its roots, but the early signs are encouraging.