No ‘fire sale’ of UK millstone as NAB profits hit

NATIONAL Australia Bank chief Cameron Clyne has named the bank’s loss-making UK arm as his single-biggest challenge, with the overseas operation weighing on profits and testing investor patience.
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Problems in the UK underscored NAB’s disappointing 22 per cent drop in full-year net profit to $4.08 billion. Even so, Mr Clyne has ruled out a fire sale of the bank’s UK business – centred on the Glasgow-based Clydesdale Bank, saying such a move would trigger deep shareholder losses.

But he said there would not be any quick fixes in the UK business, which is struggling to break out of a recession.

The latest result was hobbled by restructuring charges related that business, which also reported a $213 million loss for the year.

The profit figures were delivered as NAB took a more downbeat view on the outlook for the Australian economy, suggesting the federal government’s growth forecasts of 3 per cent for each of the next two years is optimistic.

NAB is tipping the economy will grow at 2.5 per cent this financial year and 2.8 per next financial year.

“The UK remains our biggest challenge. While data last week suggests the UK ended the recession during the September quarter, we remain very cautious on the outlook,” Mr Clyne said.

”Unfortunately there is no quick-fix solution in the UK, and believe me when I say we’ve been looking. The restructure we announced to the UK in April was the right response and will take time before that business will generate acceptable returns,” he said.

Even as the UK last week technically ended its grinding recession, NAB remains in a holding pattern there. Any sale of the business would be at a steep discount to book value and this would trigger hefty shareholder losses. So this means Mr Clyne has little choice but to see the cycle through and persist with disappointing returns over the medium term.

Earlier this year, NAB sought to limit further shareholder losses in Britain by cutting 1400 jobs, closing dozens of branches and exiting commercial property loans, in response to an economy sinking deeper into recession.

NAB’s 0.5 per cent drop in full-year cash profit to $5.43 billion was largely as expected after it foreshadowed the disappointing headline numbers earlier this month. Shares in NAB ended down 9¢ at $25.79.

NAB’s Australian business marked a sharp contrast. In particular the once problematic Australian personal banking unit returned a 12 per cent jump in full-year profit to $1.04 billion, with returns helped by lower bad debt charges and revenue growth.

But the numbers reveal the bank’s mortgage discounting strategy could soon come to an end. Margins in the Australian personal bank, which sells mortgages, were down by 16 basis points during the year to 2.03 per cent, although there were signs of margins stabilising during the second half.

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British restructure must work

CAMERON Clyne says he is hanging on to NAB’s battered British banking franchise because alternatives – including selling it at a fire-sale price – are worse. But he is only going to be able to maintain that position if the restructuring he has personally presided over in Britain works.
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NAB chief financial officer Mark Joiner summarised the problem by noting that NAB had absorbed a $700 million earnings turnaround in parts of its business during the year to post steady cash earnings of $5.4 billion.

NAB boosted total revenue by 3.6 per cent, kept costs on a tight leash and delivered a 12.1 per cent, $113 million lift in personal banking cash earnings and a less durable $431 million, 65 per cent increase in wholesale banking earnings to overcome the $700 million earnings reversal, which flowed mainly from Britain.

Just under $500 million was removed from NAB’s result as the UK operation swung from a £183 million ($A283 million) profit in 2010-11 to a loss of £139 million the following year, and NAB’s profit was also hurt by a $250 million collective loan provision that the group announced on October 19.

NAB called the provision an economic cycle adjustment, but weak economic conditions in Britain were the main reason the provision was raised.

In the year to September, the British banking unit’s own charges for bad and doubtful debts jumped from £335 million to £631 million.

NAB’s British banking franchise was hit in three ways during the year, beginning in December last year when its credit rating was cut by three notches, boosting its borrowing costs substantially.

Tight fiscal policy was by then also tipping the British economy back into a recession that ran from the December quarter to the June quarter.

Britain’s Office for National Statistics reported last week that the economy had grown by 1 per cent in the September quarter, but that included an Olympics tailwind that will not be repeated, and Clyne was rightly cautious about Britain’s prospects when he briefed analysts on the profit result.

The final hit came from NAB’s bigger British banking competitors. They cleared their own loan books out this year by conducting property fire sales, forcing prices lower and undermining NAB’s UK property loan book.

Clyne has taken on the role of chairman of the British operation, and he has cut the division’s funding costs and refocused it on retail customers and small to medium businesses by moving commercial property loans valued at £5.6 billion across to NAB’s own, higher-rated balance sheet, where they will run down over time.

He isn’t pretending that he is creating a business that he wants to keep. The aim is to get it into good enough shape to hang onto it until someone offers a price that isn’t derisory. The light on the hill in that respect is the fact that the British business made £49 million in the second half of the year out of the assets and businesses it is holding onto after the curtailment of its commercial property lending and the transfer of commercial property loans to the parent company.

It still has risk-weighted assets of about $38 billion after that shuffle, however, and would need to be four times as profitable as it was in the September half to match NAB’s overall return on assets.

It won’t hit that target. Clyne will, however, rate his chances of hanging on for higher earnings and a better exit price if he avoids a repeat of this year.

He certainly needs to avoid a repeat. The $500 million earnings reversal in Britain translates to a value loss of about $5 billion for NAB in the market, given that it trades on a prospective earnings multiple of 10 times. That is more than the British business is worth, or will be for that matter.

Clyne’s view is that restructuring costs have been taken, the ratings downgrade has occurred and won’t occur again, and that the British business has been freed of its commercial property deadweight, but he will be nervous about the British economy.

It grew in the September quarter, but is only back to where it was a year ago in output terms.

NAB’s other Achilles heel is also a latent strength – its market-leading 24.8 per cent share of business lending in this country.

When Clyne took over at the start of 2009 he expected that economic recovery would include an acceleration in business lending, but it has not happened.

Business lending was up by 4.4 per cent in the year to June but then slowed to be up only 3.8 per cent in the year to September. NAB’s business banking unit posted 1.5 per cent lower cash earnings as loan growth crawled, and debt provisions edged up.

NAB’s business lending market share will magnify its earnings power when companies start borrowing more aggressively.

Until that happens, however, its business lending footprint is a liability: Clyne has stopped trying to predict when business loan demand will lift, which is definitely wise.

The Maiden family owns NAB shares.

[email protected]南京夜网.au

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Investors pay price for bank’s UK albatross

FOR more than a decade National Australia Bank has underperformed its big four banking peers in terms of total returns on shareholder funds and return on equity. Its latest full-year results are unlikely to change any of that, particularly its second-half earnings.
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The result offers up more disappointments, particularly from its UK business and to a lesser extent its business banking operations, which suffered a rise in bad and doubtful debts.

On the domestic front, its performance is not all that different from ANZ, as the cost of deposits increased, but the UK casts a cloud over the overall result.

In the year to September 30 the bank posted a 0.5 per cent fall in total cash earnings to $5.4 billion, but deteriorating rapidly in the second half – down 7.9 per cent – largely due to a blowout in bad and doubtful debts in its UK business and its business banking division. It also reflects the slowing Australian economy.

Its business banking division’s cash earnings dipped 1.5 per cent over the year to $2.4 billion, largely due to an 11 per cent jump in bad and doubtful debts to $893 million for the full year.

NAB’s total bad and doubtful debts rose 44 per cent to $2.6 billion, with $960 million coming from its UK banking business, which suffered a cash earnings loss of £139 million in the year to September 2012.

The bank’s shares closed 9¢ lower at $25.79 on Wednesday. The stock is up 10.8 per cent since the beginning of the year, while Westpac has risen 27.1 per cent, ANZ is up 23.4 per cent and CBA 16.7 per cent.

If the economies of Europe and Australia continue to deteriorate, the expectation is that NAB’s bad and doubtful debts will follow suit, which will weigh on the group’s earnings.

The results will put added pressure on NAB chief Cameron Clyne, who has been in the top job for almost four years, after a meteoric rise, and who now finds the bank is going backwards.

To be fair, most of the problem lies in the UK and Clyne inherited the mess, but it is intensifying under his watch. The finger now needs to be firmly pointed at the board, which made the error of not extricating the bank from the UK a few years ago when it had the chance. Investors are paying a heavy price.

The UK has been an albatross around the bank’s neck for years. The big hope is that when the UK economy eventually emerges from the mire it has found itself in, NAB will be in a position to sell its operations there.

These assets do not fit in with NAB in the longer term – and they never did.

They have always lacked scale, they have taken up a lot of management time and as conditions worsened in the UK in the past few years they became a bigger and bigger drag on the bank’s earnings base and return on equity.

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Future Fund poised to boost its infrastructure assets

Future Fund boss David Gonski.THE $80 billion Future Fund has signalled it is looking to splash out on more infrastructure assets, in an attempt to shield its portfolio from further bouts of market volatility.
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With global growth expected to be sluggish as much of the world remains crippled by debt, the fund said on Wednesday it was eyeing the relative stability of infrastructure.

After announcing $2 billion plans to buy the Australian Infrastructure Fund in August, and investing in overseas airports and power plants in the past year, the fund wants to raise the share of its portfolio held in physical infrastructure to 16.5 per cent, from 12.8 per cent in June.

In the fund’s annual report, it was confident of finding more infrastructure assets to buy in the coming year. ”Australian assets are of particular interest to us, given the stronger link to domestic inflation and the fact that we do not need to hedge the currency risk,” the report said.

As well as targeting infrastructure, the fund also flagged an increase in its exposure to shares – from 39.3 per cent in June to 41 per cent at the end of this financial year.

Despite this increase, the fund said it was still ”cautious” about taking on a ”very high” level of exposure to equities due to the likelihood of further volatility on global markets.

In the year to June, the fund said its costs had fallen from $446 million to $325 million, due to a sharp drop in performance fees paid to its external managers. It had opposed 21 per cent of company remuneration reports, and 7 per cent of proposed elections of directors.

The fund’s chairman, David Gonski, said its return of 2.1 per cent in the financial year showed it had performed well considering market uncertainty, and the fund had reached a ”new stage in its life”.

”In a little over six years the Future Fund has established itself as a significant and effective institution, starting from scratch and navigating through a historic period of economic and investment uncertainty,” Mr Gonski said.

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No shares, but ex-CEO back on board at Tabcorp

PUNTERS at Tabcorp’s annual meeting on Wednesday re-elected former CEO Elmer Funke Kupper to the gambling group’s board, despite some shareholders ripping up their betting slips in protest at his lack of skin in the game.
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The former chief bookie, who now runs Australia’s other big wagering market, the ASX, doesn’t own any Tabcorp shares, apart from performance rights granted as part of his long-term incentive plan that will remain on the books for another 12 months, even though chairman Paula Dwyer admitted they were unlikely to vest.

“I’ve got the performance rights, which will run off eventually, I own a bunch of Tabcorp bonds, and now that I’m back on the board I will be looking at shares again,” Funke Kupper said.

He pointed out that as head chalkie at the stock exchange he was restricted in buying and selling ASX-listed stock. ”But you’ll probably see me ask for approval to buy shares at some point soon,” he said.

Funke Kupper said he had skin in the racing game in other ways via a greyhound and a share of a racehorse, although he admitted the nag was ”not one of my best investments, I might add”.

But he was happy to pass along some ”outside the box” tips for next Tuesday’s Melbourne Cup in the shape of imports Red Cadeaux and Lights of Heaven.

The funkster’s replacement as CEO, David Attenborough, tipped favourite Americain, as did Dwyer, who is mates with a part-owner.

Taxing times

THE mining company where Gary Seabrooke is on the board, Select Exploration, reckons there’s money to be found in the shape of coal and uranium tenements in Tanzania.

However, the Tax Office takes a different view. It believes, or at least hopes, that there is money to be found in Seabrooke’s bank account in Liechtenstein.

It has told a court that millions from that account were used to buy property, shares, a boat and a Porsche Cayenne, and to fund extensions to the home Seabrooke and his wife, Deirdre, share in high-end Perth enclave Peppermint Grove.

A little over a week ago the ATO obtained a $21 million freezing order against the couple, with Federal Court judge Antony Siopis finding that: ”Mr Seabrooke has shown over a considerable period of time a distinct disinclination to pay tax in Australia.”

Justice Siopis said an ATO audit discovered $16.8 million that flowed from the Liechtenstein bank account between 2007 and 2011.

In the other direction, between 2007 and 2010, broker Hartleys transferred $24.2 million into the account. There were also accounts in Jersey and Mauritius, the judge said.

The ATO has issued 23 years of tax bills, covering 1988 to 2011, demanding a total of $30.3 million.

Select has been suspended from quotation after completing a $3.5 million capital raising to fund its Tanzanian exploration. It returns to the market on Friday.

More storms

TOP corporate law boffin Professor Gordon Walker has flown into a tropical storm over an offshore investment fund that has been buffeted by allegations of misconduct.

Walker, who is chairman of commercial law at La Trobe University, recently joined the board of Tangerine Investment Management, based in the Cayman Islands.

It runs the £117 million ($A181 million) Axiom Legal Financing Fund, which suspended new subscriptions and halted redemptions at the weekend following a series of articles published by specialist website OffshoreAlert.

OffshoreAlert has taken aim at Tangerine’s chief executive, British lawyer and former pro cyclist Tim Schools, accusing him of benefiting from ”an extraordinary maze of related-party transactions”.

The site pointed to a loan of £7.9 million to a British law firm owned by Schools that folded and his ongoing battle with professional standards bodies in Britain.

Walker’s appointment was announced on October 15, five days after the website published allegations against Schools. CBD has been unable to reach Walker for a chat, but wishes him the best of luck cleaning up the mess.

He might need it. The Cayman Islands missed out on hurricane Sandy, but this week’s forecast is for storms.

Gender issues

IT’S been annual meeting season, when the mighty directors of Australia’s finest listed companies condescend from mahogany-clad office suites atop CBD towers to mingle over tea and biscuits with downtrodden shareholders.

These days the endless row of suits atop the stage is inevitably broken by one or two women directors, who are proudly gestured towards by the chairman as a sign of how wonderfully the company’s diversity policy is travelling.

Not so, reckons the boss of the Equal Opportunity for Women in the Workplace Agency, Helen Conway. She points out that as of October 18, just 36 women had been appointed to ASX 200 boards, suggesting the total for the year will come in at fewer than the 68 appointed in 2011.

It’s not as if there aren’t any available seats – 51 of the top 200 companies still lack a single female director. However, that huddled mass of shareholders may help smarten up board behaviour.

On Tuesday, Conway told a Sydney lunch that legislation before Parliament would require companies to report on their gender equality programs to shareholders, who can challenge companies on their performance.

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