Published on 6 May 2012
It was supposed to be Scotland's safe bank. What went wrong?
By Ian Fraser Scots Herald
Call it Cameron Clyne's 'Derby' moment.
At a council of war in that East Midlands city in 1745, Bonnie Prince Charlie had to concede that weak generalship, poor logistics and limited support put a march on London out of the question. In similar fashion National Australia Bank's chief executive Cameron Clyne decided last week that his plans for UK domination were over. It was time to concede defeat and retreat to his Scottish retail banking heartlands.
On Monday 30 April the 43-year old Australian confirmed that Clydesdale, owned by NAB since 1987, would close dozens of offices across the south of England and axe 1400 jobs by 2015 (17% of the workforce). The bank would also transfer its troublesome £6.2 billion portfolio of dodgy commercial property loans onto the parent bank's balance sheet. These semi-toxic loans, amassed by the bank in a reckless lending spree in 2005-07, would be palmed off on the Melbourne-based bank. The bank also said it would take a charge of £150 million to cover rising bad debts.
"It's all they could do, but it's been a disaster," says Brett Le Mesurier, a Sydney-based banking analyst at BBY. "It's taken them too long. Hopefully, this will bring an end to the ongoing capital drain."
Clydesdale chief executive David Thorburn has put a braver face on the episode. Last week he said: "We are absolutely open for business and will still be doing deals. The change is we are going to discontinue any lending in the commercial property sector. In practical terms we have not been active there for quite some time. Customers will not see any change."
Clydesdale was forced into this volte face after an ambitious and unorthodox 2004 plan to attack the London and south of England market turned into a disaster for the bank.
The idea was to launch a cluster of quasi-autonomous Financial Solutions Centres across England and Wales in the hope of carving off a significant slice of the corporate, SME and private banking market from the large incumbent players – RBS/NatWest, Lloyds TSB, HSBC and HBOS.
Speaking on the cusp of the southerly advance Thorburn said: ''If you're not a scale player, you need to have a differentiated strategy, something a bit different, something unique - "
Peter Shakeshaft, who stepped down as chairman of Clydesdale's Edinburgh-based FSC in 2009, said: "The FSCs, which were a bit like banks within a bank, were actually a great idea. They meant decisions were taken closer to the customers. But yes they worked better in Clydesdale and Yorkshire's immediate hinterland of Scotland and the North of England."
The idea for a "back to the future" expansion plan was hatched by Mike Williams, former executive general manager of Clydesdale integrated financial solutions. Williams successfully rolled out 73 of the FSCs across the country from a standing start eight years ago. But on April 20, 10 days before the bank announced it was killing off the project, Williams quit.
In a bravura departure note, he said: "I wish to spend more time with my family, whom I haven't seen enough of in recent years, in particular my two-year-old daughter Honey - I'm off to lose weight, get some kite-surfing in and to chase my toddler around the park." Williams handed the reins of Clydesdale's business and private bank to Paul Shephard.
Shakeshaft said: "Mike is a terrifically enthusiastic guy and was totally committed to giving the bank a competitive edge". However other former colleagues were less positive about the former Woolwich executive.
Ex-insiders suggest the FSCs struggled because Williams hired too many people who lacked banking experience. "Some were salesmen with zero experience of commercial lending," claimed one. Sources close to Thorburn dispute the claim saying many of the bulk of the new hires were qualified bankers.
Instead of the slow burn of seeking to win the relationship banking accounts of corporates and SMEs from larger banks like RBS/NatWest, HSBC and Lloyds TSB, the FSCs focused on the lower-hanging fruit of lending to commercial property, often backing speculative developments.
Mike Rowe, regional senior agricultural partner at the bank's Exeter FSC until 2009, who now runs Devon-based Moorehayes Consultants, told the Sunday Herald: "Mike Williams was the figurehead and was given a large amount of money to spend on recruitment and premises. However it wasn't clear that they knew where the concentrations of lending were, or where the expenditure was going. They were investing in recruiting people on high salaries and in posh offices, but were not training them properly. The analytical side of the credit process was very weak."
Rowe, who joined from Barclays in 2004, remembers that when Clydesdale's Exeter FSC opened that year "we were just left to get on with things. There was no training at all. We were told by a regional manager that the Clydesdale way was 'just f**k off and find out yourself'. It was a shambles.
"The credit process was extremely paper-driven. People were so focused on the process – getting the paperwork right could take hours – they ignored the bigger picture and I don't think the whole corporate lending portfolio was ever segmented by riskiness." He claimed the risk asset reviews to which executives were subjected were paper pushing exercises rather than a proper credit analyses. Several developers based in England and Scotland have told the Sunday Herald that Clydesdale was over-eager to lend.
One said: "I was subjected to high pressure sales techniques including competing by text message to get a deal done." Another corporate borrower said two Clydesdale executives turned up unannounced at his building site "offering the seductive prospect of easy, no strings lending." Some of these borrowers have since been personally bankrupted after Clydesdale reneged on earlier lending agreements, and interest rate swaps deals they believe were mis-sold by the bank turned sour. A spokesperson for Clydesdale has dismissed these allegations as "nonsense" and "without foundation".
Ben Zucker an analyst at Commonwealth Bank of Australia doubts that NAB's restructuring will be sufficient to control the financial fallout from Clydesdale's failed expansion plan. He said: "While separating NAB UK into core and non-core along with sizable below-the-line charges was largely expected, the provisioning top-up for UK commercial real estate was less than hoped for, and in our view, not enough to convince most that UK risk is now well ring-fenced." Basically he believes there may be more pain to come.
But what of the wider picture? Will Clyne's Derby moment turn into a rout for Clyne, as the Jacobites suffered four months later at Culloden? It should be stressed that the bank is not turning its back on customers in the southeast of England and will be retaining some branches in the region to which FSC customers will have their accounts transferred. Nevertheless -
"There are now some very real concerns about the future of the Clydesdale Bank," said David Watt, executive director of the IoD Scotland. "Its continued prosperity is very, very important to the Scottish economy and competition in banking is vital." He did not seem reassured by the announcement that the bank will now focus exclusively on retail and small business lending.
Sir Peter Burt, a former chief executive of Bank of Scotland and former executive deputy chairman of HBOS, said: "It seems to me that Scottish banking is being hollowed out. You cannot have a thriving economy based on branches."
John Morrison, a director of Luxembourg-based financial consultancy Asymptotix, who has been tracking the bank's performance for more than two decades, said: "No one in Scotland, least of all Alex Salmond or John Swinney, seems to recognise that this is a massive political issue.
"If Scotland is losing another bank, the whole of Scotland loses. There is not an independent nation on earth without a locally headquartered bank. And I'm afraid the Aussies no longer give a damn."
A spokesman for Clydesdale said "Our previous strategy kept us safe throughout the turmoil of the last few years, however, the world is in a very different place and we must adapt. We'll be a smaller, simpler and more focused bank, anchored in our heartlands. We're focusing on the geographical areas and products where we've long had a good track record and have the critical mass to deliver sustainable returns."
- In the 2007-2009 banking crisis Clydesdale Bank differentiated itself on claims to have lent prudently during the UK's credit binge. The Glasgow-based management's mantra was that Clydesdale was unscathed by the global meltdown, and, in implied contrast to rivals such as RBS and Lloyds Banking Group, was able to carry on lending as before.
- Since the crisis Clydesdale and Yorkshire banks have been kept afloat through large infusions of capital from their Melbourne-based parent National Australia Bank. Analysts have described them as an albatross hung around the neck of the Melbourne-based institution.
- In the boom years, a total of 73 Financial Solutions Centres (FSCs) were rolled out across the UK from 2004 onwards under the leadership of Mike Williams, executive general manager, at Clydesdale Bank. Williams was hired by former chief executive John Stewart in 2004, but "has quit to spend more time with his family". The FSC model that Williams pioneered involved the devolution of decision-making and other responsibilities to local managers.
- Prompted by shareholder concerns about weak returns from the UK outfits, and the headwinds of a double dip recession, NAB's 43-year-old chief executive Cameron Clyne hoped to persuade someone to take them off his hands.
- Talks with prospective buyers, including Lord Levene's NBNK Investments, a shell company founded with a view to acquiring high street banks and bank branches, stalled, either because they were reluctant to offer enough money to satisfy Clyne, or were deterred by doubts about the banks' financial strength. In February 2012, Clyne recognised that the chances of a deal were minimal. He finally bit the bullet and commissioned a "strategic review".
- The results of that review, announced on Monday, entails a savage restructuring that will be painful for Clydesdale Bank, some of its customers, and possibly also for Scotland. Some 1400 of the group's 8300 staff are being axed. The bank's biggest problem – a £6.2bn portfolio of troublesome commercial property loans, £500m of which are 'bad and doubtful' – has been shifted onto NAB's balance sheet. A provision of £195m has been made for redundancies.
- The FSC model that Williams pioneered looked better on paper than in practice. As part of the strategic review at least 29 of the much trumpeted FSCs are being closed, with another nine being merged with the bank's retail branches. Six back-office operations are being closed.
- Credit rating agency Moody's described the restructuring as a "substantial response to the long-standing and on-going costs associated with Clydesdale Bank". Moody's said Clydesdale's ratings were not affected by the restructuring but Standard & Poor's was sufficiently impressed by the bank's new found candour that it lifted its outlook for Clydesdale Bank from stable to positive
WHAT IT MEANS FOR CUSTOMERS
Customers with speculative commercial property developments may pay a high price for Clydesdale's troubles.
"To clean up the mess they're tightening the screws on borrowers, hiking up the arrangement fees causing some real pain," said one ex-insider who formerly specialised in commercial property lending at Clydesdale. It remains unclear what sort of approach NAB will take to working out the existing loans.
The bank have also more than doubled the sum set aside to compensate customers to whom it mis-sold PPI policies to £169m. All UK banks are having to upwardly revise the costs of compensating victims of PPI mis-selling at the moment.