National Australia Bank (NAB) confirmed today its intention to exit UK property lending through its UK banking subsidiaries, Clydesdale and Yorkshire banks, and transfer the combined £6.0bn predominantly regional UK property loan book across to the parent balance sheet.
The decision was as part of NAB’s wider strategic review to reduce it UK risk appetite, driven by rising bank funding costs, the “double-dip” return to capital depreciation in UK property markets. Last week, the Office for National Statistics (ONS) confirmed that the broader economy had also reverted to recession after two consecutive quarters of negative GDP.
NAB’s loan book transfer will begin early next year, with NAB seeking an orderly run-down over the next six years to less than £2bn by the end of 2018. The transferred portfolio will be run-off as the assets reach maturity, subject to customers’ ability to refinance or repay. Residual UK Banking CRE assets that are impracticable to transfer will be retained by the business.
The transfer of the predominantly Clydesdale Bank loan book to NAB was driven by the desire to reduce the reliance on wholesale funding which has become more expensive due to Clydesdale Bank’s credit rating downgrades, and moving to a more deposit funded base.
Provision coverage for the UK CRE portfolio has been strengthened by the transfer to the UK of £150m of the existing AUS$300m economic overlay to the Group’s collective provision. Clydesdale Bank will record this as an additional £150m charge for bad and doubtful debts in its statutory accounts offset in NAB Group’s consolidated accounts by a release of provisions in the same amount.
The total provision coverage against the UK CRE portfolio will increase to 7.5% of CRE gross loans and advances as at 31 March 2012.
NAB’s UK Banking division reported a £25m loss over the first half its Australian2012 financial year, compared to £77m profit in the prior corresponding period, higher charges to provide for bad and doubtful debts and a decline in net interest income, predominantly due to increased funding costs.
The commercial real estate portfolio was the main driver of the increase as a result of renewed weakness in the property market and the absence of a sustained economic recovery, said NAB.
Cameron Clyne, group chief executive officer at National Australia Bank, said: “In the last half year there has been a significant downgrade in the growth prospects of the UK economy, in part reflecting the drag on its recovery from heightened weakness in the eurozone.
“In addition, the commercial property market, which had previously seen signs of recovery, has recently experienced a “double dip” as the recovery stalls and other banks accelerate the reduction in their CRE exposures. This has contributed to the current downturn in the UK being longer and slower to recover than experienced in the 1930s following the Great Depression, and has led us to take these actions at this time.”