Blackfriar: Here we go again as Yorkshire Bank suffers more cuts

This week’s revelation that 1,400 jobs, 29 business banking centres and six support sites will go by 2015 means the recession – albeit the second one of recent years – has finally arrived with a vengeance.

But while it survived a big cull during the first recession, Yorkshire Bank is no stranger to cost cuts.

It’s been through the pain of repeated deep overhauls before, forced on it by its owner, National Australia Bank. Back in 1997, 20 Yorkshire Bank branches were closed as the bank bid to regain its status as one of the UK’s most profitable regional banks

Then again in 2005, NAB axed 1,700 UK jobs and closed 100 branches, including 40 Yorkshire outlets. Blackfriar was led to believe Yorkshire and Clydesdale escaped the fate that befell their peers during the downturn – savage cost cuts and streamlining – because of their prudence and risk-aversion.

They did not require Government support, and had, up until very recently, navigated the slump without slipping to a loss.

“The sort of banking we do is not exciting,” said David Thorburn in August, shortly into his reign as Yorkshire chief executive.

“It doesn’t have the highs and the lows. There’s a proportion of the population that want something that’s predictable, dependable and stable.”

But the banking can never be a risk-free activity, and Yorkshire Bank over-extended itself in commercial property.

The banks were “over reliant” on commercial property lending, admitted NAB CEO Cameron Clyne this week.

“NAB’s overweight position in that space, and market share at arguably the wrong point of the cycle (strong growth in business lending between 2007 and 2009) gave us little comfort around the outlook for this portfolio,” said Nomura analyst Victor German.

The banks’ commercial property book has seen bad debts soar, with the proportion of the portfolio which is impaired by three or more months rising to 12.4 per cent by the end of March from 10 per cent three months earlier.

The banks’ bad debt writedowns leapt by £131m to £282m in the six months to end of March, mainly driven by a deterioration in loans for offices, housing developments and shops.

NAB is taking matters into its own hands. It is assuming direct ownership of £6.2bn of the commercial property book, which it intends to wind down.

Talk of an imminent sale has been scotched by Clyne, who said he received no formal offers, adding valuations are too low. A big bulk-up acquisition is also off the cards as an “unattractive option”.

Combined with the retreat to retail and small/medium business lending in its Northern and Scottish heartlands, Yorkshire and Clydesdale will be a “simplified and re-oriented” business where the “return profile is higher”.

There are positives to the strategy. The banks still have strong brands, liked by their customers. The precious branch network will remain unscathed.

They grew mortgage lending by almost 11 per cent in the first half, and deposits increased £800m to £24.2bn. They will have a strong funding profile which will be more funded by deposits, but come without the commercial property overhang to worry investors and ratings agencies.

Even so, the scale of the cuts must be a personal blow to David Thorburn, who Blackfriar believes would dearly have liked to grow the banks. He was chief operating officer when Yorkshire Bank pioneered ventures like speed networking and growing its business centres.

The aggressive expansion of business lending in the South East came in 2005, when it set a target of 30 “integrated financial services centres” there.

At the time NAB’s then CEO, John Stewart, explained why it was expanding in Britain. “It is three times the size of the Australian banking market and offers growth opportunities not available to our Australian competitors,” he said at the time.

How things have changed.

Instead, Thorburn must preside over two shrinking banks in a market where scale is vital, returns are slim and the pressure from regulators is high.

It’s retreating from most of its business banking in the South. It blames reaching the crisis with insufficient “critical mass” there, despite the South generally being regarded as a more lucrative banking market.

Thorburn also revealed most small businesses with “straightforward needs” will now only get “direct” banking – i.e. via the phone or internet. Costly in-person meetings will be reserved for big firms, he told analysts.

However, this looks like a U-turn from its commitment to offer small and medium-sized enterprises more face-to-face contact, launched in early 2011.

Aside from the obvious impact on staff morale, these are changes which risk alienating business customers.

Thorburn’s next big challenge is to keep Yorkshire Bank relevant and grow it with the limited resources at its disposal.

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