New National Australia Bank chief executive Andrew Thorburn has further demonstrated the intensity of his crusade to rid the organisation of its troubled and distracting British legacy assets and get on with the job of improving the core Australia and New Zealand operations.
After only three months in the top job, Thorburn has engaged in a rapid-fire program to deal with the mistakes of previous managements.
On Thursday he announced the potential float of the British Clydesdale Bank.– a move that should please investors that have witnessed the bank produce substantial losses from a series of British mishaps, in particular the costly mis-selling of products by the Clydesdale and Yorkshire banks.
This was primarily responsible for the near 10 per cent fall in 2014 earnings NAB reported on Thursday. It is an outcome that will cost Thorburn and his management team personally – despite the fact that it is not of their making. He said on Thursday that bonuses will be the lowest they have been for some time.
But the bigger issue going forward is how Thorburn is going to grow profit and improve returns from the bank's core operations. In particular, his challenge is to retain NAB's mantle of being number one in business banking. This has traditionally been its strong suit but in the Australian and New Zealand markets this has been eroded and is now under challenge.
Rather than aspiring to move into business areas in which it has not been strong, NAB appears to be seeking to cement and improve its foothold on specialist areas such as agribusiness and health, as well as growing home loans. It appears this is the area in which the bank will focus its capital expenditure.
He acknowledged that the 2014 result was not an acceptable outcome. He told analysts the bank hadn't delivered what it expected, nor what they had expected.
The fall in earnings had already been flagged and the final result was slightly better than anticipated. But history will not judge Thorburn on his ability to fix the mistakes of the past but on how successfully he closes the gap between NAB and its competitors.
Ignoring all the one-off adjustments, the bank turned in a 12.4 per cent improvement in cash earnings.
This result was greatly helped by the significant tailwind it received from a further reduction in bad and doubtful debts. While strong asset quality reflects well on the management's risk settings, there is a limit to how much banks can rely on this to boost earnings.
But the underlying performance of the bank's core operations are still lagging its competitors in the Australian market on many metrics, including the all-important return on equity.
If a portion of the bank's equity can be liberated by selling out of the underperforming global assets, the process of improvement will receive a kickstart. But NAB is not providing a time frame on when this could happen, although Thorburn confirmed that advisers had been appointed. The economic environment in Britain today is certainly more conducive to selling assets than it was even a year ago. So the market should expect that it will be all systems go on ejecting these assets.
Thorburn said it was "disappointing to record a full-year result that includes $1.5 billion after tax in UK conduct provisions and other impairments".
"Within the Australian banking business, I am pleased with the ongoing momentum in personal banking and the more stable performance from business banking in the second half of this year. Excluding the more volatile markets and treasury income, Australian banking revenue grew 1.8 per cent over the September 2014 half-year.'
Thorburn made it abundantly clear that management would now be clearly focused on getting the Australia and New Zealand franchises back on track to better returns. He flagged that it was essential to invest in the core business in areas where NAB had a competitive advantage, including home lending and lending to small to medium enterprise.
Analysts would like to have had a bit more clarity on how the bank would deal with its wealth management operations. His comments that wealth products are an essential part of the bank's customer offering probably puts a dampener on any expectations that these operations would be offloaded.
Given wealth management returns remain "below acceptable levels", the bank is evaluating a number of options to improve the returns of this business.
Interestingly, this asset was spared "impairment" despite the fact that many have been calling for this outcome for a number of years. Exactly how NAB would unleash the capital demands of wealth assets while still owning the asset is a complex question that NAB is not yet prepared to talk about.Author: Elizabeth Knight
Source: The Age