Yorkshire Bank parent facing a tough year

Ratings agency Fitch said lenders including National Australia Bank – which also owns Clydesdale Bank – will see bad debt charges rise in 2013 but should be helped by stronger balance sheets and solid profits.

The Australian banking system has so far escaped the global financial crisis relatively unscathed, aided by a boom in demand for commodities and mining from fast-growing economies. But slowing Chinese growth is raising fears over the strength of Australia’s economy.

“A Chinese ‘hard landing’ remains the most likely factor to drive a change in the outlook for the sector,” said Fitch. “This would lead to a sharp correction in commodity prices and a substantial slowdown in Australia, impacting bank asset quality, profitability and capital ratios.”

NAB chairman Michael Chaney recently warned shareholders at its annual general meeting over slowing growth in China, India and Brazil. However, Fitch said a “hard landing” for China is not its most likely scenario.

NAB’s UK operations have proved the biggest drag on its performance. NAB revealed last month that full year profits fell 22 per cent to $4.1bn.

Mr Chaney said the weaker results were “a result of a deterioration in the UK economy which had a significant impact on the bank’s performance”.

Fitch said Australian banks’ revenue and profits growth will come under pressure as competition intensifies, and it expects impairment charges to “rise modestly” in 2013.

“Subdued credit growth and a moderate economic slowdown are likely to present some challenges for Australian banks in 2013,” said Tim Roche, director in Fitch’s financial institutions group.

“However, improvements to funding, liquidity and capital, and continued solid profitability should help them to navigate through these headwinds.”

“Cost control is likely to remain a key focus for the industry,” added Fitch.

NAB tried to sell Yorkshire and Clydesdale in 2010 and 2011, but failed to find a buyer so initiated a deep cost-cutting exercise.

In April, it revealed plans to cut 1,400 jobs, close 29 business banking centres in the south of England and refocus Yorkshire and Clydesdale on their northern heartlands. The banks also transferred £5.6bn of commercial property loans to their parent’s balance sheet.

“The UK restructuring is now well advanced, although it will take the best part of the next year to complete it,” said Mr Chaney last month. “This will give us a UK banking operation which is largely self-funded and profitable.”

Fitch said Australia’s banking system is likely to face “increased challenges in 2013”. However, it said its base case is for a “modest, manageable deterioration, reflecting increasing arrears and impairments in Australia’s non-mining business sector”.

Fitch has NAB’s long-term debt on an AA- rating, with a stable outlook.

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