Yorkshire Bank shaken by downgrade of its debt rating

YORKSHIRE Bank and its sister Clydesdale’s debt rating has been slashed by Moody’s over doubts about their Australian parent’s commitment to its UK arm.

The ratings agency yesterday said comments by a senior National Australia Bank executive that it is open to a sale of its UK operations “raises questions about the long-term strategic commitment of NAB to the UK market”.

It cut Clydesdale Bank’s senior debt rating by a notch to A2 from A1, and warned this could be cut further to A3, based on its ongoing review of Government support to UK banks and building societies.

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Slashing the credit rating could make it tougher for the business to raise funds on the wholesale money markets as its risk profile is heightened.

UK chief executive David Thorburn said he was “disappointed” but insisted the banks remains strong and well capitalised.

The banks also yesterday revealed sweeping reforms of their retirement obligations. Yorkshire and Clydesdale plan to demand pension contributions of up to nine per cent of salary from 4,000 staff, which union Unite said will be a “real blow” at a time when household budgets are already stretched.

The downgrade follows weeks of intense speculation about the banks’ future. NAB recently rejected a £2bn offer from private equity firm Sun Capital for its UK operations as too low, and has also held preliminary talks with NBNK Investments about a possible offer.

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Under constant pressure to either beef up its UK operations or sell them, NAB even toyed with buying about 630 Lloyds Banking Group branches, but eventually withdrew from the auction.

Mark Joiner, NAB’s executive director for finance, helped stoke speculation by recently saying NAB is open to a sale. “We would prefer to own the asset, raise the returns and exit a few years later, or IPO it. There are options,” he said.

Moody’s said this makes it less likely NAB will support its UK banks in future, downgrading Yorkshire and Clydesdale’s long-term bank deposit and senior debt rating.

“The rating action reflects a reduction in Moody’s view of the likelihood of parental support for Clydesdale from its parent,” said the ratings agency.

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“This follows public comments from senior management at NAB which suggest that, although NAB is likely to remain a supportive parent of Clydesdale while it owns the bank, it is open to a sale of the bank in the future. In Moody’s view the discussion about a potential sale of Clydesdale in the future raises questions about the long-term strategic commitment of NAB to the UK market.”

Yorkshire Bank is a trading subsidiary of Clydesdale Bank.

Moody’s added the banks’ short-term debt and deposit ratings are also under review for a possible downgrade from Prime-1.

However, NAB chief executive Cameron Clyne insisted its support has not changed.

“Our primary focus in the United Kingdom has been, and remains, organic growth,” he said.

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“There has been much speculation in the UK about potential mergers and acquisitions in the past 12 months and how our UK business may fit in with this, but in all cases, this has been driven by other parties who are considering divesting or acquiring. Our shareholders’ interests require that NAB considers all potential options but NAB’s focus on organic growth has not changed, nor has the nature of the group’s support for our UK business.”

NAB has a portfolio of 187 Yorkshire Bank branches, 152 Clydesdales and 73 business and private banking centres in the UK. It employs around 8,500 in the UK, including about 2,000 in Yorkshire.

Moody’s is currently reviewing the standalone financial strength of more than a dozen UK banks and building societies, based on British regulators’ unwillingness to bail them out in future crises. That review includes Yorkshire and Clydesdale banks.

Mr Thorburn, chief executive of Yorkshire and Clydesdale banks, said: “We are disappointed at the outcome of Moody’s review particularly when they acknowledge NAB as a supportive parent to our UK business.

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“Strong in our own right, we remain part of one of the strongest banking groups in the world. We are fully committed to maintaining our strong capital, funding and liquidity positions.”

Figures released in May showed the bank’s retail deposits and longer term wholesale funding covered 94 per cent of its lending.

The banks grew pre-tax profits by 25 per cent to £101m in the six months to the end of March.

NBNK moves into second round

New banking outfit NBNK Investments has submitted a second-round bid to buy some 630 Lloyds Banking Group branches which could fetch £1.5bn, according to reports.

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Rival bidders Sun Capital and Co-operative Financial Services have yet to put in formal second-round offers. The branches were put up for sale after Lloyds received a government bailout during the credit crisis. The auction, codenamed Project Verde, offers a chance to create Britain’s seventh-biggest bank in one fell swoop. The sale includes 4.6 per cent of personal current accounts and five per cent of the mortgage market, contributing about £500m of pre-tax profit in 2008 and income of about £1.4bn.

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