Why NAB wants Scotland vote to fail

When Andrew Thorburn became chief executive of National Australia Bank last month he knew that, along with the good bank in Australasia, he had inherited something of a poisoned chalice in the UK. It may be about to get worse.

A poll in the UK's Sunday Times at the weekend showed that, for the first time since the debate about Scottish independence began, the “yes” vote is now in front. The poll showed a 51:49 vote in favour of independence.

With NAB’s Clydesdale Bank headquartered in Scotland and having a significant exposure to the Scottish economy, a win for the pro-independence camp at the referendum in 10 days’ time would be a major setback for NAB, and not just for Thorburn’s hopes of a relatively quick exit from the troublesome UK banking business.

There are a lot of “known unknowns” raised by the prospect that Scotland might break away from the UK, some of which could have major implications for its over-sized financial sector.

There’s a major query (and debate) about whether Scotland would be able to continue to use the British pound as its currency; there is a question mark over whether the Bank of England would remain lender-of-last-resort for its banks; there is uncertainty about Scotland’s share of the UK’s sovereign debt; and there is uncertainty as to whether either or both the diminished UK and Scotland would be able to retain membership of the European Union.

A number of major Scottish institutions, including RBS, may have to re-domicile in England if the “yes” vote prevails on the 18^th of this month to comply with a European Union directive that a bank’s headquarters has to be where the majority of its activities are.

Clydesdale’s operations straddle Scotland and Northern England, with some exposure to southern England. Only a little over 20 per cent of its loan book is in Scotland itself.

Thorburn recently said that a vote in favour of independence could create significant extra costs and risks for Clydesdale and that NAB had “appropriate” contingency planning in place.

Credit Suisse analysts have estimated that re-domiciling Clydesdale could wipe out the equivalent of half NAB’s 2014-15 UK earnings, or around $170 million, as it would be forced to create a new head-office in England while shutting down its existing head-office in Scotland.

They have also said a “yes” vote could create financial instability in Scotland, capital outflows and reduced transfer payments from the UK, which could in turn result in a higher level of bad debts within Clydesdale.

For Thorburn, who has started his period as CEO with a bang, announcing major changes to his leadership team on his very first day on the job and then following that up with plans to offload, via an initial public offering in the US, NAB’s Great Western Bank, headquartered in South Dakota, a “yes” vote could be a major blow to his plans to finally exit the UK.

He has made no secret that is his ambition, and an improving UK economy and banking sector provided some prospect that it could finally be achieved, removing a business that has been a major drag on NAB’s performance and sharemarket rating since the onset of the financial crisis.

If the push for independence is successful, the window for a successful exit is likely to be pushed out by years, not months, with NAB potentially having to incur significant extra costs and being exposed to considerable uncertainties in the meantime. It’s obvious which outcome from the referendum NAB will be hoping for.