NAB’s Thorburn springs into action

For the best part of a decade NAB has dithered over the fate of its strife-torn UK banking business. Not Andrew Thorburn.

For the best part of a decade National Australia Bank has dithered over the fate of its strife-torn UK banking business. Relatively new chief executive Andrew Thorburn, however, has grabbed his first and best opportunity to act decisively and accept the inevitable financial pain associated with a UK exit.

Thorburn, who was appointed NAB (NAB) chief executive in August last year, has presided over a whirlwind of activity ever since. But the big decision, the one his predecessor Cameron Clyne was unable to bring himself to make, was always going to be how and when to quit a UK presence it has had for nearly 30 years. Clyne, appointed on the eve of the financial crisis, was frozen by the desire to protect value.

Thorburn has no such compunction. He knows the market ascribes no value to the UK presence — it may well be a negative within NAB’s market value — and that the tide of ‘conduct’ costs and provisioning and unpleasant press associated with the UK bank hasn’t abated.

With the performance of the UK business improving — it has effectively completed the $10 billion run-off of its rotten commercial property loan portfolio, it has about $1.4bn of provisioning for the remaining conduct issues and its earnings (about $260 million in the March half) are now on the right trajectory — the business is better positioned for an exit. The performance of recent listings of other mid-sized UK banks is also encouraging.

NAB has for some years been looking at either selling or separately listing the Clydesdale business. While it hasn’t completely abandoned the option of a trade sale, it is now working towards a demerger and initial public offering by the end of this year.

Under the plan unveiled today NAB shareholders would be given 70 per cent to 80 per cent of the new entity, which would have total assets of around $75bn and shareholders’ funds of about $6bn, with the remaining equity offered to institutions.

Clydesdale would be listed in the UK, with a CHESS depositary interest listing on the ASX. Over time one would expect NAB’s Australian shareholders to cash out their interests and the Clydesdale register to be largely UK-based.

The complicating factor — as it was when AMP sought to distance itself from its troubled UK businesses in 2003 — is the position of the UK regulator, the Prudential Regulation Authority, which is insisting that NAB set aside contingent capital in the UK in case the conduct costs exceed its provisioning.

NAB will have to leave £1.7bn (about $3.25bn) of capital next to the UK bank if the demerger is executed, which would equate to about 84 basis points of core capital that would be in limbo indefinitely. If the legacy conduct costs eventually turn out to be contained within existing provisions, or less than the £1.7bn, that capital would be released back to NAB.

Thorburn has decided to take the opportunity created by the UK regulator’s action to do more than raise the capital required, which he could probably have done by arranging underwritings of his dividend reinvestment programs.

Instead he’s announced a $5.5bn rights issue that will not only cover the contingent capital requirement but pre-empt the anticipated increases in regulatory capital flowing from the Murray Inquiry, the changes to global regulatory settings and the Australian Prudential Regulation Authority’s own evolving requirements.

The net effect of the capital raising once the UK actions are taken into account will be to increase NAB’s core common equity CET1 ratio to about 10 per cent, placing at the most conservative end of the major bank spectrum of CET1 ratios.

Thorburn hit the ground running after his appointment, with wholesale senior management changes on day one, the progressive sale of NAB’s Great Western Bank in the US, sell-offs of the problem loan portfolio in the UK and the bulking up of his cohort of business bankers amid the myriad of changes he has implemented.

Alongside today’s blockbuster-related announcements of the UK demerger and the $5.5bn rights issue, he also announced that NAB had entered a reinsurance arrangement with a major global reinsurer that equates to an effective sale of 21 per cent of its in-force retail insurance book.

The arrangement, which represents about 15 per cent of the embedded value of NAB Wealth’s life insurance business, will reduce the perennially underperforming unit’s cash earnings by about $25m a year but release $500m of capital, improve NAB Wealth’s return on capital and reduce the group’s exposure to a difficult segment of the industry.

The announcements of structural changes to NAB came within the announcement of its first half results, which were positive. Cash earnings were up 5.4 per cent, although they were boosted by the improvement in UK earnings.

More importantly, the cash earnings of the Australian bank were up 4 per cent and the troublesome wealth management unit headed by Andrew Hagger lifted its earnings 28.2 per cent. New Zealand earnings were up 4.5 per cent.

The core of the group, which will be better exposed if and when the UK operations have been distanced from it, is actually quite a strongly-performing business in what is a relatively low-growth and very competitive environment.

Without the distraction of the UK and the continual diversion of capital into its low-returns environment as a consequence of, initially, the meltdown in its commercial property sector post-GFC and then the conduct issues, NAB would be perceived quite differently by the market.

Amid the flurry of announcements NAB made today was another of significance. Long-serving chairman Michael Chaney — he’s been in the chair a decade — will retire at the annual meeting in December and will be succeeded by former federal Treasury Secretary Ken Henry. Henry has been on the board since 2011.

NAB also announced the appointment of PricewaterhouseCoopers’ deputy chair, Anne Loveridge, as a director — its third female board member on what will be a board with 10 non-executives.

When Thorburn was appointed chief executive officer in the August last year, he essentially promised to be a man of action.

The March half result today by itself would probably have been seen positively, given that it comes in the wake of relatively lacklustre results from NAB’s peers.

The announcements that accompanied the result, however — the UK demerger, the capital raising and the wealth management initiative — would seem to reinforce the view that Thorburn is a chief executive in a hurry. He has taken his first real opportunity to address the difficult aspects of the legacy he was handed and, assuming NAB can execute his plans effectively, gives himself a clean slate to build on in 2016.