Yorkshire Bank owner insists on changes

“Retaining the existing business mix and structure will not be an outcome,” he said.

While Yorkshire and Clydesdale have remained profitable through the financial crisis, their lower returns drag down NAB’s overall profitability. Their return on equity – a key measure of profitability – is lower than their cost of capital.

NAB blamed a recent surge in bad debts on its UK arm, driven by commercial property losses.

Conditions in the UK have “deteriorated markedly” in recent months, according to Mr Clyne, who warned investors of a prolonged downturn in the UK.

The charge for impaired loans had increased to 1.27 per cent of its UK loan book by December, from 0.86 per cent in September.

Meanwhile, Europe’s sovereign debt crisis and downgrades from ratings agencies have hiked its cost of funding. NAB has repeatedly ploughed capital into Yorkshire Bank, and Citigroup calculates NAB has provided net funding of £2.8bn, around 10 per cent of its loan book.

Yorkshire and Clydesdale’s 8,300 staff, who number more than 2,000 in Yorkshire, have been warned job losses are “inevitable”.

Bulking up by buying growth appears to have failed for Yorkshire Bank, despite the recent availability of banking assets. Yorkshire’s chief executive David Thorburn is thought to have looked at both the 318 RBS branches eventually bought by Santander, and the 632 Lloyds Verde branches being acquired by the Co-operative. New banking outfit NBNK is now thought to be weighing up a bid for Yorkshire and Clydesdale. Other bidders could include investment group Sun Capital, and One Savings, backed by investment firm JC Flowers, with a £2bn-£2.5bn price tag mentioned.

Yorkshire has 185 branches, mainly in its heartland of the North and the Midlands, while Clydesdale has 152 branches, mainly in Scotland. Only a handful of branches are in the South.

“Demographically and economically these regions have had lower average incomes, lower economic growth and we suspect lower levels of deposit gathering potential,” said Citigroup analyst Craig Williams. He believes the Yorkshire and Clydesdale are too small to compete effectively in the UK.

They also have a growing image problem. J.D Power’s recent retail banking customer satisfaction survey ranked Clydesdale at the bottom, while Yorkshire was fourth from bottom.

The tone of NAB’s strategic review suggests an operational overhaul. “Getting the right business mix and structure is vital and the review will shape that,” said Mr Thorburn. “However, it is clear that the economics of our retail banking operation are strong.”

Analysts believe achieving a decent price for the brands may be too difficult in this climate, although some think NAB could accept a loss on the disposal.

Victor German, banking analyst at Nomura, said: “Although domestic (Australian) investors would certainly prefer NAB selling its UK assets, realistically getting an adequate price is going to be challenging. NAB is more likely to reduce its exposure by running off its commercial book.”

Soured commercial property loans were responsible for more than half of the UK impairment charge in the three months to the end of December.

Craig Williams believes “Project Orderly Rundown and Sale” is the best way to recoup value for shareholders. “All of the other possible bank sales involve cleaned up mortgage books, and some associated personal lending and no commercial or business lending books,” he said.

The banks’ back office IT and support operations may be streamlined, with asset finance, invoice finance and acquisition finance all under review. Administrative hubs such as Merrion Way and Brunswick House in Leeds, plus Glasgow and Clydebank in Scotland could be shrunk.

The key growth areas will be retail banking and lending to trading businesses – with expansion in mortgages likely to continue.

[email protected]