May 6 (Bloomberg) -- Cameron Clyne, catapulted to the helm of National Australia Bank Ltd. in the depths of the global financial crisis, saw only one way out.
Throwing away the playbook he had used as a management consultant advising banks to embrace risk to achieve higher returns, Clyne adopted a more conservative approach for Australia’s largest lender by assets. The 6-foot-6 (1.98 meters) former rugby player closed an investment-banking unit, shrank the ailing U.K. property portfolio and broke away from his biggest competitors by luring borrowers with lower mortgage rates, he said in an interview last month in Sydney.
Clyne, 45, also gave up a 35th-floor office for a desk among his staff at the company’s headquarters in Melbourne and reached out to irate customers through radio shows.
“We are at our best when we are boring,” said Clyne, who took over as chief executive officer in January 2009. “We are not going to do anything spectacular. We are going to deliver what we say to our customers.”
Under Clyne’s stewardship, NAB shares have climbed 62 percent, while credit-default swaps, the cost of insuring against losses on its debt, have tumbled 44 percent. The stock rose 0.2 percent to A$33.79 at 1:36 p.m. in Sydney today.
“Clyne has been the right man for the NAB turnaround,” said Angus Gluskie, Sydney-based chief investment officer at White Funds Management Pty, which owns NAB shares. “He has certainly been able to give the business new momentum in terms of its position in the Australian marketplace, as well as being able to limit the damage from some of their weaker areas.”
Still, NAB is the worst performer since the end of 2008 among Australia’s four biggest banks, trailing Melbourne-based Australia & New Zealand Banking Group Ltd. and Sydney-based Commonwealth Bank of Australia and Westpac Banking Corp.
Shares have been weighed down by NAB’s U.K. operations, where mounting bad debts last year triggered the first drop in profit since 2009. The U.K.’s foundering economy torpedoed Clyne’s plans to sell the business or expand through acquisitions, leading him to shrink the unit by cutting more than 1,400 jobs starting last year.
NAB, Australia’s most valuable bank a decade ago, is now ranked fourth. Its return on equity, a measure of how well the firm reinvests earnings, was 14.2 percent at the end of September, lower than its competitors, and its net interest margin, or the profitability of its lending operations, also lagged behind at 2.11 percent. Earnings from its biggest unit, lending to businesses, slid 1.5 percent in the fiscal year, adding to investors’ concerns.
“In the last few years, they have materially underperformed their peers,” said Simon Burge, chief investment officer at Sydney-based Above the Index Asset Management Pty, which owns NAB shares. The U.K. unit in particular “has just been a noose around the bank’s neck.”
Clyne, who had been running NAB’s New Zealand unit since 2007, was appointed to the bank’s top job on July 31, 2008, six days after news of losses on credit-market investments triggered the biggest one-day drop in its stock in 21 years.
The former PricewaterhouseCoopers LLC consultant, who had been responsible for about 1,000 people as the firm’s youngest-ever Australia managing partner before leaving for NAB in 2004, faced the task of turning around a 150-year-old bank with about 40,000 employees. What followed was a “fairly tumultuous” time, he said, describing a five-month transition that ended when he took over from CEO John Stewart.
“At some point, I was wondering if I would make it to the first of January,” Clyne said, recounting working for as many as 40 days at a stretch without a break. “You just didn’t know how the world was going to play out.”
As CEO, Clyne immediately began paring risk. He told investors three months after taking over that his primary focus would be on improving shareholder returns, which had been weighed down since 2001 by losses and writedowns at a Florida mortgage business that was subsequently sold.
Clyne cut expenses, divested assets and trimmed dividends for the fiscal year ended in September 2009 by 25 percent to 146 cents a share. He has since increased the payout to shareholders to 180 cents, which still trails the 194 cents returned to investors in fiscal 2008.
He also shut the investment-banking unit, nabCapital, which had racked up losses during the global financial crisis. Clyne moved assets he wanted to exit -- mainly U.K. and U.S. investments, including collateralized debt obligations, commercial property and structured-asset-finance holdings --into a new unit with a portfolio valued at about A$26.5 billion ($27.2 billion) at the end of March 2009.
Over the next 3 1/2 years, Clyne cut that portfolio by 73 percent to A$7.2 billion by the end of September 2012. The bank’s value at risk, a measure of potential trading losses in one day, dropped 43 percent to A$8 million by the end of September, after climbing to A$14 million in September 2008, according to company filings.
Those measures show that Clyne is on the right track, said Brett le Mesurier, an analyst at BBY Ltd. in Sydney, who recommends clients buy NAB shares.
“The best thing that has come out of his time so far as CEO has been that there have been no new disasters,” he said. “When you run a bank, one of the most important things is to avoid making large mistakes, and he has managed that.”
NAB’s success in winding down positions through trading, rather than writing down the value of the assets quickly and digesting what could have been a $5 billion loss, has given Clyne confidence to handle the remaining U.K. assets, he said.
He moved 5.6 billion pounds ($8.7 billion) of commercial real estate onto NAB’s own balance sheet in October, and in March he said the remaining U.K. operations had become profitable. The economic climate in that country will determine prospects for the business, which Clyne described last month as a “work in progress.”
Investors are less convinced that his approach will work.
“Every update on that situation tends to be worse than before,” said Paul Xiradis, CEO of Ausbil Dexia Ltd., which manages A$9.5 billion in assets in Sydney. “The perception is, they are yet to get their hands around the issue.”
At home, Clyne inherited funding constraints that threatened to crimp profitability as global capital markets froze. The bank’s retail unit, which could have collected deposits to close the gap, was instead shrinking. Clyne boosted NAB’s share of funding from deposits to 66 percent as of September 2012, up from 56 percent four years earlier, by offering higher rates.
Becoming CEO during the financial crisis affected Clyne’s management style, he said. One of his first steps was to relinquish the executive suite used by his predecessor on the 35th floor of a building on Melbourne’s Bourke Street. He took a desk about 20 meters (66 feet) from the staff cafe on the third floor of an office in the Docklands area, where executives for the domestic operations sit.
“No one is critically inspired by a leadership 30 miles from the frontline,” Clyne said. “They don’t want missives from remote mahogany offices.”
The crisis also shaped how he viewed customers, he said.
“There was genuine public anger around financial institutions,” especially in North America and Europe, Clyne said. “There was a different sort of anger here, because banks were very profitable.”
Defusing that anger and winning back customers’ trust became a priority. Clyne has participated in six radio talk shows, taking calls from people who ask him about issues ranging from mortgage rates and the safety of Internet banking to NAB’s funding of local colleges. He plans to do another show within two months, said Brian Walsh, a spokesman for the bank.
The focus on customers’ concerns and a drive to win market share for NAB’s retail bank led Clyne to begin abolishing fees on credit cards and bank accounts in his first year as CEO, winning praise from Australia’s Treasurer, Wayne Swan, and forcing competitors to follow suit.
Clyne also promised clients lower rates on mortgages amid mounting public discontent that Australia’s four largest banks, which control about 85 percent of the A$1.1 trillion home-loan market, were moving lockstep in raising borrowing costs.
A February 2011 advertising campaign, begun on Valentine’s Day and featuring the lender in a mock relationship breakup with its three competitors, helped Clyne win 1 million new clients and boost NAB’s share of mortgage loans to about 15 percent from 12.8 percent in August 2009, according to filings.
Still, NAB remains the third-largest mortgage lender in an economy whose growth rate is set to drop to 2.5 percent this year, according to a February central bank forecast. Mortgages are expanding at almost the slowest pace since at least 1977, central bank data show. Competition has increased, and gains in market share for home loans may slow, Clyne said.
The turnaround isn’t complete. The bank in March changed some senior managers and said it planned to cut costs by A$800 million within five years. Clyne, who was awarded A$8.8 million in total compensation including salary, stock options and other benefits for the 12 months through September, vowed to simplify products, reduce duplication across units and invest in new technology to reach the savings target.
First-half results, scheduled to be announced May 9, may help allay investor doubts. Profit probably rose 42 percent to A$2.91 billion for the six months ended March 31, according to the average of eight analysts’ estimates compiled by Bloomberg.
Clyne is growing into his position after having “tripped” a few times, said Ausbil Dexia’s Xiradis.
“He has learned a lot, he has benefited from the experience NAB has gone through,” the fund manager said. “From here, he would be a better, more seasoned banker and can tackle the issues far more aggressively than before.”
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