The downgrade comes despite NAB’s repeated injections of capital into the Scottish bank, as well as the transfer of a troubled £5.6 billion commercial real estate (CRE) portfolio to NAB’s balance sheet.
Explaining the rationale behind the change, Moody’s said the bank’s strategic pull-back from commercial real estate and other areas of business lending had “materially weakened” the bank’s franchise as a retail and selective business lender.
The bank’s losses in its CRE portfolio highlight “historical failures of risk management and governance”, said Moody’s – problems that will take “several years” to fix.
In the short term, Clydesdale is faced with the risk of further deterioration in the quality of the remaining business loan portfolio as well as continued low profitability, according to Moody's.
“The weakness of [Clydesdale’s] franchise and uncertainty over its future strategic direction, alongside NAB’s stated intention to sell the bank in the medium term, leaves Clydesdale in an uncertain position,” Moody’s said.
But despite public statements by senior management at NAB that indicate “an ambition to sell its UK business and a limited strategic commitment to the UK market”, Moody’s believes NAB will continue to be supportive of the UK bank in order to protect its own balance sheet.
Moody’s sees “no immediate threat to creditors from [Clydesdale’s] near-term challenges”, adding that the bank is well-capitalised and has sufficient liquidity thanks to the intervention by NAB.
The lowered rating applies to the Scottish bank’s long-term bank deposits and senior debt. Moody’s has also lowered the short-term debt and deposit rating of Clydesdale to Prime-2 from Prime-1.
Moody’s baseline assessment of Clydesdale now sits at ba1, down from baa1.
An upgrade of the bank is unlikely in the short to medium term, given the diminished franchise strength, execution risks associated with the restructuring, and pressures within the business loan portfolio, according to Moody’s.
NAB chief executive Cameron Clyne said the downgrade was “disappointing”, given the restructure of the UK operations announced in 2012.
“There has also been significant improvement in the funding, liquidity and capital position of the business, with Clydesdale Bank loans more than 90 per cent deposit-funded,” he pointed out.
There has been no change in the ratings outlook for NAB itself, which maintains its Aa2 stable rating with Moody’s, said Clyne.
NAB has owned Clydesdale Bank and its subsidiary, Yorkshire Bank, since 1987.
