Banking: Can Duffy make Clydesdale a contender?

Dominic O’Neill
Published on:

Clydesdale Bank has been nothing but trouble for National Australia Bank for much of the past decade. Now it is to be cut loose via a demerger and IPO. New CEO David Duffy insists he can make Clydesdale a genuine challenger to the big six UK banks.

David Duffy illustration-600

David Duffy, the new chief executive of Yorkshire Bank, will be familiar with the claim among locals that Yorkshire is "God’s own country". For investors and bankers in its parent National Australia Bank, however, recent years in the northern UK heartlands of Yorkshire and Scotland (home of Clydesdale Bank) have been far from heavenly. 

During a period when the Australian economy was booming, NAB’s UK banking business was a heavy drag on group profits. The nadir came in 2012, when Clydesdale – whose licence encompasses the Yorkshire brand since NAB merged the two banks in 2005 – recorded a £139 million cash earnings loss. That year, Clydesdale transferred £5.6 billion of underperforming UK commercial real estate assets to NAB, after a botched attempt to build up in business banking in the UK’s more affluent southern regions.

The losses have made NAB’s UK ties particularly frustrating, not least because the business in Australia enjoyed especially strong revenue growth in 2012 and 2013. Clydesdale managed to post a positive cash earnings profit in 2013, but losses from the UK commercial real estate run-off then more than wiped out any benefit to NAB. Meanwhile, reconciled earnings figures show Clydesdale continued to lose money in 2013 and 2014, largely due to the UK’s consumer-redress scheme for mis-sold payment protection insurance. 

Perhaps ironically, now that the UK’s economic recovery is gathering pace and the country’s regulator may be easing pressures on banks’ profits, NAB finally looks set to rid itself of Clydesdale – just as Australian economic growth slows due to weaker mineral demand from China. As Euromoney went to press, Duffy and his bosses at NAB were preparing to set Clydesdale free as an independent entity for the first time since the 1920s (NAB bought Clydesdale in 1987 and Yorkshire in 1990. Clydesdale was previously part of Midland Bank). In October, NAB said it hoped to complete a demerger of Clydesdale to existing shareholders, before an IPO of between 20% and 30% of the bank in London and Sydney in February 2016. 

"I think the markets are good," says Duffy, pointing to the £5 billion IPO of Worldpay in October. He estimates the value of Clydesdale at the IPO at £2 billion to £2.5 billion, or about 0.7 times book value.

For Duffy, the return to profitability of Allied Irish Banks in 2014 presented an opportune time to leave after a "very tiring, demanding" three-year tenure at the bank. He would otherwise have been getting stuck into what he says would have been at least another five years of managing the Irish state’s gradual exit, starting with an IPO. "It was the only time I could reasonably do it, in a stable way, with good relationships with everyone around," he explains, meaning in particular relations with the finance ministry.

He thought about taking a year off, and took calls from bigger banks of the kind he used to work for. Duffy started his career at Goldman Sachs, before eventually becoming head of wholesale banking at ING, then spearheading Standard Bank International in London (the markets unit of the latter was sold last year to China’s ICBC). "Going back into a big bowling lane in some giant organisation didn’t really attract me – it’s just processing," Duffy says.

The lure of Clydesdale, which he joined in June, was that he thinks it, of all the UK’s so-called challenger banks, has the best chance of closing the gap on the country’s handful of dominant banks.


"This is an opportunity to change the face of UK banking," says Duffy. He admits that sounds grandiose; Clydesdale is only a quarter of the size by assets of Nationwide, the smallest of the six biggest UK lenders. It is 18 times smaller than HSBC’s UK business, the smallest of the big four UK franchises.

Yet Clydesdale is already the biggest of the next tier of banks, by revenues and assets. The branch network is clustered in Scotland and Yorkshire, but in mortgages, which make up around two thirds of its balance sheet, more than half of its book is in London and the southeast, much originated via brokers. Duffy deems his bank to have better odds of gaining on the incumbents than more specialised challengers: those with more than 90% of their loans in areas like mortgages (Virgin Money), consumer finance (Tesco Bank) or SMEs (Shawbrook).

Although it still needs to set up its own treasury function, Duffy claims Clydesdale, which is headquartered in Glasgow and named after the river that runs through the city, has the further advantage of already operating largely independently, so needing less investment in areas like IT systems than banks carved out of big UK banks as part of competition requirements, such as TSB from Lloyds Banking Group or Williams & Glyn from RBS. 

He readily admits there has been a lack of investment in the Clydesdale and Yorkshire brands. But Duffy is already succeeding in one of his first priorities, before a shareholder vote on the demerger in January, which is overcoming a "negative bias" against Clydesdale among NAB’s Australian investors, while mustering interest in the IPO among potential new investors, including in the US, UK and Asia.

The investment banks coordinating the transaction – Bank of America Merrill Lynch, Macquarie Capital and Morgan Stanley – had "very positive feedback" from a non-deal roadshow earlier this year to Sydney, Melbourne, Hong Kong, New York, London and Edinburgh. The Australians liked the idea of getting exposure to the UK story as the Chinese and Australian economies slow, says Duffy. "They looked at this as diversification with good timing." 

Crucially, the chief executive and his team can point to a £1.7 billion indemnity from NAB against past conduct charges (principally the mis-selling of PPI) that the UK regulator asked for as a condition of the demerger. NAB raised A$5.5 billion ($4 billion) in a rights issue in May, mostly to fund the indemnity. Despite news in October of £390 million in additional PPI provisions, which will be deducted from the indemnity, Duffy reckons there is only a "very low risk" that future charges for PPI will exceed the remaining indemnity.

"The calculations we had done on what might be the most extreme outcome, you can imagine, are significantly lower than the amount the regulator finally settled on [for the indemnity]," he says. "They’re the ones on the hook for whether you’re sufficiently capitalized for the future, so they added another layer of conservatism."