By James Chessell
National Australia Bank's European operations suffered a substantially larger bottom-line loss in 2014 but directors are confident the underlying performance of the up-for-sale division are improving.
According to accounts filed with the UK registrar of companies, National Australia Group Europe Limited, which operates Yorkshire Bank and Clydesdale Bank, said its loss in the year ended September widened to £190 million ($359 million) from £44 million in the previous 12 months.
NAB chief executive Andrew Thorburn said he was looking at options to exit the region.Credit: Jessica Hromas
While NAB provided investors with considerable detail about the performance of the UK unit during its annual results presentation in late October, the statutory accounts do contain additional information including the bottom line result, staff numbers and executive pay.
With costs and provisions from the UK dragging down the Melbourne bank's full-year profits by 9.8 per cent to $5.18 billion, chief executive Andrew Thorburn said he was looking at options to exit the region, including a sharemarket float.
The bottom line loss was caused by £433 million of "legacy conduct" provisions to cover compensating customers for mis-selling financial products such as payment protection insurance. NAB's UK unit also incurred a £23 million charge for "capitalised software assets".
However, the accounts reaffirm a more positive underlying performance also emphasised at the annual result. The business recorded a £131 million increase in profit before tax.
"The key driver in this has been a material reduction in impairment losses on credit exposures reflecting improving economic conditions," the strategic report notes. "This was supported by an improvement in net interest margin".
While net interest income was a higher thanks to a growing retail mortgage portfolio and the directors note "the UK economy continues to show signs of improvement", the accounts are a reminder the potential float will not be an easy sell to UK investors.
The UK division's critical Common Equity Tier 1 capital ratio – a measure of the bank's financial strength – decreased to 9.4 per cent from 10.7 per cent because of additional capital requirements from UK regulators and the loss. Operational and administrative expenses were up almost a third because of the conduct issues faced by the division.
"Excluding these impacts, underlying operating and administrative expenses were broadly flat on the year," the accounts note.
The weak financial performance was reflected in the remuneration for David Thorburn, NAB's most senior executive in the UK. He package including salary and share based payments was valued at £955,000 for 2014 compared with a £1.5 million package the previous year. However, the decrease was mostly because of lower, long-term incentive payments. Mr Thorburn's base salary of £450,000 remained the same.
Clydesdale and Yorkshire operate 298 retail branches, 42 business and private banking centres mainly in Scotland and the north of England as well as online operations. Staff numbers had increased slightly to 7224 although the accounts the number of full-time employees had shrunk.
NAB has appointed investment banks Morgan Stanley and Macquarie to examine a float although sources familiar with the process say this could take some time. NAB had previously hired Goldman Sachs to sell the UK assets but was not satisfied with the level of interest.
A number of so-called challengers banks in the UK have either successfully floated (TSB and OneSavings) or are considering a market listing (Virgin Money). These mid-tier players hope to carve out profitable businesses taking on the UK equivalent of the Big Four – Lloyds, HSBC, RBS and Barclays – amid a period of stronger economic growth in the UK.