National Australia Bank to Review U.K. Operations

National Australia Bank, the country's top lender, opened the door for the sale of its underperforming U.K. operation worth about $4.5 billion after a rise in bad debt charges and sluggish growth.
National Australia Bank, the country's top lender, opened the door for the sale of its underperforming U.K. operation worth about $4.5 billion after a rise in bad debt charges and sluggish growth.

NAB said it was starting a strategic review of the over 300 branches through its Yorkshire and Clydesdale brands, as it reported an 8 percent rise in first quarter cash profit, just shy of analyst expectations.

The UK banking operation was a key reason for the rise in NAB's bad debts charge after several quarters of falls, sending its shares down nearly 4 percent in late trade.

"It's very difficult to achieve book value in a divestment in the current environment -- it would therefore seem unlikely that's what the strategic review would seek near term," said Credit Suisse analyst James Ellis said, referring to a potential sale. "A business restructure seems more likely."

NAB reported a cash profit of A$1.4 billion ($1.5 billion) for the three months ended December, up 7.7 percent from A$1.3 billion a year ago, but just shy of a A$1.45 billion average forecast of five analysts polled by Reuters.

Cash profit, a measure that excludes one-offs and non-cash accounting items, is closely watched by investors.

NAB kicked off the earnings season for Australian banks. Commonwealth bank of Australia is due to report its results on Feb. 15, Westpac on Feb. 16 and Autralia and New Zealand Banking Group on Feb. 17.

NAB did not specify what it would focus on in the review except saying the aim was to lift returns. It can sell the business, valued by analysts at $4.5 billion at book value, or exit business lines or whittle down its portfolio. Another less likely option is to buy assets to make it bigger.

Chief Executive Cameron Clyne said the review, due to be completed in May, would lead to changes.

"The review will assess many options and it's still too early to determine the recommendation. We can say that retaining the existing business mix and structure will not be an outcome," Clyne told analysts in a conference call on Tuesday.

Late last year media reports speculated that NAB could sell its UK assets in a reverse takeover to British banking venture NBNK, which would in turn bid for the 630 Lloyds branches on sale.

Mark Joiner, NAB's executive director of finance, said in late 2011 they would prefer to own the UK assets, raise returns and exit a few years later or look at IPO options.

NAB's U.K. assets have a 2-3 percent market share and are profitable, but are a drag on the group's overall returns.

NAB, which has grown mortgages at nearly twice the industry rate, said higher deposit and funding costs were impacting its core Australian operations.

"Increased wholesale and deposit funding costs had a material effect on our financial performance this quarter, reducing our revenue by approximately A$80 million," said Clyne.

WEAK LOAN GROWTH

Last year, NAB and its three main rivals together made a record $25 billion in profits as a booming resources sector helped the Australian economy sail through the global economic downturn with little of the turmoil experienced in Europe and the United States.

But credit growth has fallen to the lowest level since the 1970s as households increase savings and corporates pay down debt, forcing banks to focus on cost control.

Investor focus is on funding costs, with Australian banks relying on offshore markets for the bulk of their $100 billion annual funding needs.

As funding costs soar, investors fear margins will erode and banks will look to pass on the higher costs to customers. NAB's first quarter net interest margin fell to 2.19 percent, from 2.28 percent in the half year to Sept. 2011.

NAB fully passed on a 25 basis point cut in the central bank's cash rate in December to mortgage rates, even as higher funding costs raised concerns some banks would hold back part of the official rate cut.

NAB, which is expected to raise between $20 billion to $25 billion of wholesale funds in 2012, said it has raised A$7 billion so far this financial year. Fund raising by banks so far this year has come at twice the average margin a year ago as the European crisis roils credit markets.

Provision for doubtful debts increased to A$545 million, from A$493 million in the first quarter last year, as UK banking conditions grew increasingly difficult.

NAB reported its capital position remains strong. Its Tier 1 ratio, a measure of a bank's ability to absorb losses, was 10.02 percent compared with 9.7 in September.

NAB shares, which were the top performer among the large banks in 2011, have fallen 0.3 percent so far this year, making it the worst performer. (Editing by John Mair and Jean Yoon)