What ex AIB boss David did next: Duffy's Clydesdale has a lot to prove
In two months’ time, Clydesdale Bank will be free for the first time in 95 years.
The proud Scottish name – which also runs Yorkshire Bank – has been owned by other banks since 1920, and periodically neglected over the decades.
Its most recent owner is National Australia Bank which bought into the UK in 1987 and almost 30 years later wants to get out again. The plan is to float on the stock market in February.
But if a major institution like NAB does not want to keep a hold of the Clydesdale and Yorkshire Banking Group, why should any small investors buy its shares?
The group has an unusual shape with core, historic markets of Scotland and northern England, but has little presence elsewhere in the country. It has been beset by problems with PPI mis-selling and bad loans in commercial real estate.
But after years of pain, chief executive David Duffy argues the bank is now prepared for growth.
“The problems of the past have been resolved, the capital indemnity is in place, we have a strong capital position and balance sheet and we now have all the tools in the tool box and we now see ourselves in the best possible competitive position,” he said.
That position begins with a plan to grow fast outside the bank’s heartland. In its core regions, the bank has 9.1pc of personal current accounts, but just 3.1pc nationally. It has 14pc of business accounts in its historic markets, but only 1.4pc elsewhere.
Given most transactions in banking as a whole are now carried out online and most mortgages are found through brokers rather than branches, going national should no longer, on the face of it, be an impossible challenger.
Chief financial officer Ian Smith said the group has a substantial and modern IT system which allows this online growth the take place rapidly.
"We have a standalone well invested platform that many competitors would like to have. We can expand our business without changing the platform,” he said.
“Our core banking platform and key IT systems can be scaled to process double the existing transaction volumes without incurring material additional costs.”
In the next five years Clydesdale plans growth of as much as 50pc in its mortgage and retail loan books, and 25pc in small business lending.
However, Mr Duffy's appointment this year gives some indication of the challenges ahead.
The chief executive certainly has a strong reputation, but he is best known as a turnaround veteran.
Most notably, he spearheaded the recovery of Allied Irish Bank, piloting it back to stability after the financial crisis.
Clydesdale is not in such a dire position, but nor is the job likely to be plain sailing, hence hiring a boss who is used to taking on a challenge.
While the bank may believe itself ready to take on large numbers of new customers, much of the challenge comes in persuading those customers to join.
Clydesdale gained only 7,167 customers through the current account switching scheme in the three months to October, for example.
That is better than some rivals, but far less impressive than the net 32,533 customers gained by Halifax and 64,203 won by Santander. If Clydesdale wants to really earn the “challenger bank” tag and expand nationwide, it will have to do better than that.
In mortgages it is doing better, growing its mortgage book by 11.2pc in the past year from £18.4bn to £20.5bn, largely gaining custom through brokers.
But analysts are sceptical as to the bank’s ability to achieve growth that is consistent and sustainable.
“It is a plain vanilla UK retail and commercial bank, and it is quite difficult to compete in those markets – ultimately for most customers when borrowing, when getting a mortgage… it comes down to the price,” said analyst Gary Greenwood from Shore Capital.
That makes it hard for a mid-sized bank, even with a strong brand or regional identity, to build up a loyal customer base – Clydesdale could end up pricing loans cheaply and paying a lot for deposits, only to find that those customers move quickly to any rival which can offer a better price.
“In the near-term this will put pressure on margins and returns until Clydesdale has build sufficient scale, and the risk is that they never get there, and have to permanently either keep prices low or attract low-quality customers,” Mr Greenwood said.
Given Clydesdale and Yorkshire Bank’s progress turning itself around so far and the scale of the challenge ahead, it is worth asking what it will gain from separation from National Australia Bank.
If bosses are so happy with its current position, what will get better from independence?
The executives argue that it is better for the bank to be the sole focus of bosses at the head office in Leeds, rather than a peripheral interest of a boardroom on the other side of the world.
In practical terms, it is harder to pin down exactly what that means, and whether it is worth losing the financial clout of a big parent.
Mr Duffy certainly does talk in very local terms.
"There are opportunities we can now develop. Manchester has a higher GDP than Scotland and we've had a presence there or 150 years but not made a significant impact,” he said.
“Now we can and we'll look at opportunities in other key locations where we have capability such as Birmingham and Edinburgh."
Judged from Leeds, those are important and distinct cities. Looking over from Australia, the 80 mile gap between Manchester and Birmingham probably looks less significant.
The British bosses are also planning a spending splurge to upgrade the mobile app as they focus on attracting more young, well-off customers who plan to borrow, rather than less wealthy, older customers with a propensity to save hard.
The presentation given to shareholders shows 77pc of customers are relatively old and only 23pc young, compared with an industry-wide demographic mix of 69pc to 31pc.
Younger customers typically hold more products each and borrow an average of £10,000 more than older customers, they are more valuable customers.
That said, the bank has already gone online, launched a mobile app and expanded its mortgage lending nationally under existing ownership, so Clydesdale does not appear to have been overly constrained on these plans to date.
“I don’t see what difference [independence] would make. I would guess that NAB had an overriding desire not to sink more capital resources into the UK so Clydesdale was strategically constrained, but it is not obvious that will be removed [by floating],” said analyst Ian Gordon at Investec.
“It hasn’t got a structural cost advantage or a scale advantage and it has an unattractive cost-to-income ratio relative to its peers. It is a bit of a struggle.”
In terms of scale, the bank is larger than its closest rivals TSB and Virgin Money, and is expected to get a stock market valuation of up to £2bn – but it will be tough to convince new shareholders to put their bets on such an unusual and historic bank.
Clydesdale and Yorkshire Bank’s own presentation to shareholders admits it is likely to sell for less than its book value, meaning the pressure is on Mr Duffy to use all of his turnaround expertise to prove this bank can be worth at least the sum of its parts.