National Australia Bank Ltd., owner of Britain’s Clydesdale Bank, will cut more than 1,400 jobs in the U.K. after the deteriorating local economy torpedoed plans to sell the unprofitable business.
The Melbourne-based bank will incur 456 million pounds ($742 million) in costs to shrink the U.K. unit, it said in a statement today. National Australia Bank will transfer a 6.2 billion-pound U.K. commercial property portfolio, most of it loans, to the group balance sheet, leaving Clydesdale to focus on individual borrowers and smaller businesses.
The decision to pare back comes after National Australia Bank injected at least 800 million pounds of capital into the U.K. since 2010 as property loans soured and funding costs rose. Chief Executive Officer Cameron Clyne, who said in 2009 his bank had to either grow in Britain or exit, said today it’s no longer viable to expand through acquisitions or sell the business.
“It’s all they could do, but it’s been a disaster,” said Brett Le Mesurier, a Sydney-based banking analyst at BBY Ltd. “It’s taken them too long. Hopefully, this will bring an end to the ongoing capital drain.”
National Australia Bank climbed 0.3 percent to A$25.23 at the close in Sydney, extending this year’s gain to 8 percent. Australia’s benchmark S&P/ASX 200 index rose 0.8 percent.
Clydesdale Bank had become over-reliant on commercial property, where bad debts have risen since March 2010, Clyne said. Charges at the U.K. business led to a 16 percent drop in National Australia Bank’s net income to A$2.05 billion ($2.1 billion) for the six months ended March 31, it said today.
“In the last half year, there has been a significant downgrade in the growth prospects of the U.K. economy,” Clyne said in the statement. “The action we are taking is needed to adapt to this current economic environment.”
The U.K. economy shrank in the first quarter as Britain slid into its first double-dip recession since the 1970s, data this month showed. Gross domestic product fell 0.2 percent from the fourth quarter of 2011, when it declined 0.3 percent.
After buying Clydesdale Bank in 1987, National Australia Bank chose to sell Irish assets acquired through the deal to Danske Bank A/S for 967 million pounds in 2004. Then-CEO John Stewart opted to invest further in the U.K. instead of selling the entire Irish and U.K. business, valued that year by Credit Suisse First Boston at A$11 billion.
“It’s not been a strategy that’s delivered the right returns,” Clyne, who took charge of National Australia Bank in January 2009, told reporters on a conference call.
The bank’s U.K. operations posted a loss of 25 million pounds in the six months ended March 31, compared with cash earnings of 77 million pounds a year earlier, National Australia Bank said. Bad and doubtful debts from commercial real-estate loans more than doubled to 197 million pounds from the preceding six months.
The cost of raising money to fund Clydesdale Bank’s lending business increased after Moody’s Investors Service cut the lender’s credit ratings in September. As property loans soured, National Australia Bank in January injected an additional 400 million pounds into the U.K. business.
Plans for a sale have been stymied because the U.K. pound is near a 27-year low against the Australian dollar, while a deteriorating British economy means potential buyers face their own problems, National Australia Bank said.
“We’ve never received offers for this business,” Clyne told investors on a conference call. “Growth through acquisition in the U.K. is not an attractive option. These are hard decisions but the right decisions.”
The U.K. job cuts, equivalent to 17 percent of National Australia Bank’s British workforce, will be completed by September 2015. The lender employs 45,000 people worldwide.
The remaining U.K. business will focus on the retail market and lending to small and medium-sized businesses in Scotland and northern England, the bank said.
Of the total 456 million-pound restructuring cost, redundancies, software write-offs and lease breaks will account for 157 million pounds. About 120 million pounds relate to increased claims from payment protection insurance, the bank said.