National Australia Bank Ltd. Chief Executive Officer Cameron Clyne urged a “patient approach” toward the lender’s poor performing U.K. assets, saying a turnaround depends on a revival of the British economy.
“The U.K. is clearly a difficult situation,” Clyne told Australian Broadcasting Corp.’s ‘Inside Business’ program in an interview broadcast yesterday. “Our shareholders do not want to see a distressed exit, but in the interim we’ve got a very difficult economic environment.”
A double-dip recession in the U.K., where National Australia Bank has owned Scotland’s Clydesdale Bank and the Yorkshire Bank since 1987, weighed on earnings. The Australian lender increased its charges for bad and doubtful debts from the U.K. unit by 335 million pounds ($537 million) and restructured the division, shifting a 5.6 billion pound commercial real estate portfolio to the group balance sheet.
National Australia Bank’s net income sank to A$4.08 billion in the 12 months ended Sept. 30, from A$5.22 billion a year earlier, the Melbourne-based bank said Oct. 31. That was the first full-year profit decline since 2009 and missed the lowest of six analyst estimates compiled by Bloomberg, which averaged A$4.83 billion.
“The core franchise, which is the Yorkshire Bank in Clydesdale, actually made 49 million pounds in the half, so it’s a profit-making business,” Clyne said. “So the question will be to what degree can we run the commercial real estate off and will commercial real estate prices stabilize, and that’s very much a function of the economy.”
Britain exited recession last quarter with the quickest expansion in five years, a government report showed last month. The economy grew 1 percent in the three months through September from the previous quarter, the fastest pace since 2007.
Australia’s private-sector loan growth has been subdued over the past year, crimping demand in the retail bank’s core market even as the country’s central bank attempted to stimulate the economy by cutting interest rates 1.5 percentage points.
“Despite housing finance perhaps being in decline, we’ve got one of the most competitive offers out there and we’re growing share, but we’re growing share in business but in a very subdued credit growth environment, I mean business credit is at a 30-year low,” Clyne said. “But it’s very much a function of the economy and business confidence has been low and correspondingly demand for business credit has been low.”
Australian banks have sought to finance a larger share of lending from deposits since the global credit freeze, paying higher rates for the more stable funding. Deposits make up 53 percent of liabilities from about 40 percent in 2008, with lenders raising less money from bond markets as a consequence, according to central bank figures.
As a result, the nation’s major lenders have failed to fully match the Reserve Bank of Australia’s reductions in the overnight cash-rate target.
National Australia Bank, Commonwealth Bank of Australia and Australia & New Zealand Banking Group Ltd. passed on 20 basis points of the RBA’s 25 basis point cut last month. Westpac Banking Corp. cut by 18 basis points. A basis point is 0.01 percentage point.
“We are still really absorbing an increase in funding costs and it tends to vary from period to period: at some points it will be driven more by a spike in the wholesale funding costs and other times around competition for retail deposits, and I think there has been more pressure on our funding costs coming from retail deposits in recent times, wholesale’s been a little more benign,” Clyne said.
He said there won’t be a “short-term return” to the RBA cash rate and bank interest rate movements being aligned.