Restructuring of business put down to weak UK economy
National Australia Bank Group (NAB),parent company for both UK-based banks, said higher wholesale funding costs, subdued credit demand and a weakening commercial property market has promoted the review.
Although NAB has not said publicly the review will lead to job cuts across both UK banks, David Thorburn, chief executive of NAB's UK operations said the bank would have to make some "tough decisions".
He said: "The time is right for us to re-examine our business given the recent reversal in the economic recovery, the structural changes in the UK banking market and our performance in that context.
"NAB, working with UK management,commenced a strategic review to reposition our business for this changed environment and to improve shareholder returns.
"Getting the right business mix and structure is vital and the review will shape that. However, it is already clear that the economics of our retail banking operation are strong.
"We will continue to support our branch network and invest in developing online and telephone banking services for both retail and business customers.
"We will also remain committed to providing support for savers and mortgage customers across the UK.
"Although reshaping the business will mean that we will have to take tough decisions, we are confident that the outcome will provide a strong and sustainable future for Clydesdale and Yorkshire Banks."
Cameron Clyne, NAB Group chief executive, added: "It is clear that the UK economy is likely to experience a much longer period of subdued growth with the ongoing sovereign debt crisis in the Euro-zone and the continuing austerity program by the UK government. UK GDP declined by 0.2 per cent in the December quarter.
"These difficult conditions have adversely affected the performance of UK Banking.
"Given our view that recovery is now a longer term prospect, NAB has commenced a strategic review, and will work with UK management to appropriately reposition its business mix and structure for the changed economic environment and improve returns.
"We will inform the market of the outcomes of the review, which we expect to occur by the time of our interim result in May 2012."
Last month NAB allocated s400 million of new capital to its Clydesdale Bank subsidiary in order to raise its Tier1 capital ratio by 1.4 per cent on a pro forma (limited requirement) basis.
NAB said the level of bad debts and loan impairments rose to 3.22 per cent in the three months covering October 1 to December 31, up from 3.12 per cent the previous quarter.
The Australian bank, which posted a 7.7 per cent increase in first quarter profits yesterday of AUSD $1.4 billion, up from AUSD $1.3 billion a year earlier.
However, shares in NAB dropped by four per cent yesterday on the news the bank had launched a strategic review of its UK operations.
NAB said: "The UK business needs to respond to the poorer outlook and to adapt to structural changes in the UK banking market.
"In light of this, the group has commenced a strategic review, and will work with UK management to appropriately reposition its business mix and structure for the changed economic environment and improve returns."
Last September credit rating agency Moody's downgraded Clydesdale Bank and Yorkshire Bank amid doubts about NAB's commitment to its UK operations.The downgrade came a week after NAB executive director for finance, Mark Joiner, said publicly NAB was considering a possible sale or flotation of the group's UK operations.
Joiner had ruled out a fire sale of the Clydesdale and Yorkshire banks, saying it was a "rotten time"to sell, given the weakness in the markets.
Last year NAB rejected a s2 billion bid for its UK operations by private equity firm Sun Capital, saying it was too low.
NBNK Investments, a new banking venture set up by former Lloyds of London chairman Lord Levene, had also expressed an interest in buying the Clydesdale and Yorkshire banks.
However NBNK Investments withdrew from negotiations after failing to agree a price, and then focused its attentions on making a formal s1.5 billion bid for the 632 branches for sale by Lloyds Banking Group.
Lloyds, which is being forced to sell the branches by the European Commission as a result of its s17billion UK Government bailout, is reported to be close to agreeing a sale to Co-operative Bank.
The Lloyds branch sale had also attracted early interest from NAB, though it withdrew its interest in the auction in the early stages.