National Australia Bank mulls over more options for UK exit

Exiting would prove better for the bank.

National Australia Bank Limited has announced that it would now consider a broader range of market options to exit its UK subsidiary, Clydesdale Bank plc, including those provided by public markets.

According to a research note from Moody's Investors Service, an initial public offering of Clydesdale would be credit positive for NAB because it would improve asset quality and provide an exit from a lower-return business.

Further, it would also allow management to refocus on the bank’s core Australian and New Zealand operations, which have structurally superior profitability and stronger asset quality.

Clydesdale’s asset quality remains weaker than NAB’s core Australian and New Zealand businesses as a result of weaker underwriting and the significant deterioration in the UK operating environment.

As of September 2014, Clydesdale’s nonperforming loans ratio was 2.01% -- despite the transfer of impaired commercial real estate exposures to the NAB group balance sheet in 2012 -- compared to 0.90%9 for the NAB group excluding Clydesdale.

Here's more from Moody's Investors Service:

Although Clydesdale’s net interest margins have been improving, the bank has had to take significant additional provisions for conduct-related matters.

On 10 October, NAB announced that it would increase provisions by £420 million for remediation and redress for customer complaints relating to its Payment Protection Insurance and a further £250 million relating to interest rate hedging products.

Conduct matters continue to be a significant ongoing issue for UK banks generally and remain a drag on NAB’s earnings from its UK business. NAB’s UK conduct-related charges in fiscal 2014 (ending 30 September) totalled AUD1.4 billion and reduced the group’s net operating income by 13%.

NAB has indicated that it wants to sell Clydesdale Bank, subject to a favourable transaction. NAB’s earlier sale of £625 million of UK commercial real estate loans and Lloyds Banking Group plc’s (A2 negative) partial IPO of TSB Banking Group plc (unrated) in June suggest that UK market conditions may now be improving.

These transactions may indicate that an initial public offering of Clydesdale is now being considered by NAB.