With its numerous miss-selling and impairment charges holding back Clydesdale's parent company, National Australia Bank's plans to spin off the Scottish bank have taken shape. The curtain should go up on the "challenger" bank's stockmarket debut in February, and although a first dividend in 2017 will be "modest", investors could eventually receive 50% of earnings if things go well.
In an IPO that is expected to value Clydesdale at around £2 billion, NAB plans to sell 25% of the regional bank to institutional investors, with the remainder given to existing shareholders if they wave through the plans in January. They'll get one Clydesdale share for every four they own in its parent company. NAB has circled 2 February for conditional trading to begin.
Clydesdale, founded in Glasgow in 1838, has been a weight around NAB's neck, with hefty PPI miss-selling fines and impairment charges on bad property loans. Although halving in the year to 30 September, bad debt charges were still worth £38 million.
But it's had an overhaul ahead of the IPO. Clydesdale's capital equity tier 1 ratio (CET1) - a measure of financial strength - is now at 13.2% versus 9.4% a year ago. Its loan book has also been reshaped to have a greater contribution from mortgages and its asset portfolio has been de-risked. To improve returns, a new management team will drive the focus back to its core retail business and small and medium-sized businesses (SME). In just over 12 months there have been 11 new additions to the management team, including lifelong banker David Bennett as deputy chairman, ex-Allied Irish Banks boss David Duffy as CEO, and Ian Smith as Deloitte man finance chief.
As one of the largest mid-sized banks, the group has 121 Clydesdale branches in Scotland and 153 Yorkshire branches in England serving 2.6 million retail and 179,000 SMEs. It's spent 11 years in the intermediary market and has a 2% share of national lending. Compared to the other UK challenger banks, Clydesdale has one of the largest shares of UK gross loans at 2%.
In the year to 30 September, customer lending rose 4% to £1.1 billion and double-digit deposit growth took the measure to £26.3 billion. Cash earnings did dip to £1.56 million, however, due to bad debt charges and lower operating income.
Early next year, the launch of its "B" platform should support target customer acquisitions and drive the group's omni-channel strategy. After increasing its near-term investment strategy, the bank has a four-pillared strategy to create double-digit return on tangible equity, from the current 5.1%.
This will include changing its asset/liability mix away from corporate/tracker portfolios towards higher yielding SME segments, improving cost efficiencies, benefiting from an interest rate rise and any "other" regulatory changes.
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