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NAB may face more UK conduct charges, Deutsche Bank says

NAB CEO Andrew Thorburn has given a strong signal he intends to sell Clydesdale. NAB CEO Andrew Thorburn has given a strong signal he intends to sell Clydesdale.
Parliamentary criticism of National Australia Bank's United Kingdom arm, Clydesdale Bank, has raised the risk it may face higher costs from compensating victims of misselling, which could affect plans to float the business.

While market conditions for a float are improving, a new note from Deutsche Bank analyst Andrew Triggs says a UK Treasury select committee report last week highlights the uncertainty facing Clydesdale on "conduct risk".

Mr Triggs said the committee report, which criticised Clydesdale's approach to compensating small business customers who bought interest rate hedging products known as "tailored business loans", raised further risk of conduct charges.

NAB CEO Andrew Thorburn has given a strong signal he intends to sell Clydesdale. Photo: Josh Robenstone

"We believe this suggests a risk of impairments down the track," he said.

Scotland-based Clydesdale last week defended its internal review process against the criticism, while NAB set aside $654 million for provision charges relating to interest rate hedging products in the UK in its latest full-year accounts.

However, Mr Triggs said NAB's latest provisions related mainly to reviews that had excluded fixed-rate loans, which were flagged as a concern by the UK committee.

At the same time, Mr Triggs also highlighted the improving market for UK banking assets, reflected in a £1.7 billion takeover approach to lender TSB late last week, a 29 per cent premium.

Although this was a positive sign, Mr Triggs said the conduct issue could still affect NAB's hopes of selling Clydesdale, potentially through an initial public offering.

"While conditions appear to be improving for a UK listing, the Treasury committee report does suggest ongoing uncertainty on conduct risk, which could impact NAB's earnings growth and/or a Clydesdale listing," said Mr Triggs, who has a "hold" rating on NAB.

JPMorgan analysts have also raised the issue of provisions relating to compensation in recent weeks. Latest results from British lenders Lloyds and RBS included higher provisions for compensation relating to products that were missold to consumers.

NAB has sought to overhaul Clydesdale in recent years to improve the performance of a business that has dragged on shareholder returns, appointing a new management team and targeting retail customers more than small businesses.

NAB chief executive Andrew Thorburn has given a strong signal he intends to sell Clydesdale, and on Monday he reiterated that exiting the UK market remained a key priority, as the bank focuses more on Australia and New Zealand.

Yet the potential for higher compensation costs remains a key point of uncertainty among investors. The latest concerns relate to hedging products that had much higher break costs than customers expected.

Bell Potter analyst TS Lim, who has a "buy" rating on NAB, said he thought Clydesdale had probably made adequate provisions over the issue, though it was difficult to be certain.

JPMorgan analyst Scott Manning, who has an "underweight" rating on NAB, said the issue of provisions relating to misselling would have to be a factor that any potential buyer of Clydesdale would consider.

The takeover approach to TSB comes less than a year after it floated – an event that was seen as a positive sign for NAB because TSB is a similar size to Clydesdale and it showed strong investor demand for bank stocks.

Author: Clancy Yeates
Source: The Sydney Morning Herald

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