Clydesdale and Yorkshire Banks announce interim results

10 May 2007

London, 10 May 2007: National Australia Bank Group, owner of the Clydesdale and Yorkshire Banks, today released interim results for its UK operations, for the 6 months to 31 March 2007. These results demonstrate that the UK business has real momentum.

Highlights:

Comparison to 6 months to 31 March 2006

• Earnings before tax up 20.4% to £183m
• Post tax earnings up 22.6% to £130m
• Average gross loans and acceptances increased 20.0% to £23.4bn
• Average retail deposit balances increased 20.2% to £14.9bn
• Cost Income ratio improved from 62.7% to 58.6% - down 6.3% on 64.9% in Sept. 2005
• Cash earnings per average FTE increase by £6k to £29k, up 26%

Comparison to 6 months to 30 September 2006

• Earnings before tax up 5.2%
• Post tax earnings up 5.7%
• Average gross loans and acceptances increased by 7.8%
• Average retail deposit balances increased by 10.4%
• Cost Income ratio improved by 90 basis points from 59.5% to 58.
• Cash earnings per average FTE increase by £2k to £29k, up 7%

Lynne Peacock, Chief Executive Officer, said:

“These results demonstrate the UK business has real momentum with further strong lending and retail deposits growth, firm cost control and a stabilisation in the bad and doubtful debt charge".

“The strategic agenda outlined in 2005 remains firmly on track and, at 58.6%, our cost to income ratio continues to fall – an improvement of some 6.3% since its peak in the September 2005 half".

“Across our UK operations there has been excellent average volume growth. Our network of integrated Financial Solutions Centres continues its strong delivery, with business lending volumes up by 28% on the corresponding period. Retail deposit volumes grew by over 20% on the corresponding period, with continued strong performance from our direct channels. Mortgage volumes also increased by 24% during the same period".

“Today’s results demonstrate this is becoming a strong and sustainable business which continues to deliver on its promises.”

Operational Milestones

• Underlining increased efficiency, cash earnings per average full-time equivalent employee increased by 26% on March 2006. This is despite over 300 full-time equivalent staff having been recruited into customer-facing roles. Improvements in back office efficiency have enabled growing business volumes from broadly stable staffing numbers.
• To meet growing business demand across the Financial Solutions Centre network, 233 staff were recruited. An acquisition finance capability has been set up and the Clydesdale Bank private customer offering, featuring enhanced relationship management was re-launched.
• In the prestigious Forum of Private Business survey Clydesdale Bank was rated as the best Scottish Business Bank for the second time running while Yorkshire Bank climbed from second place to joint first for the UK as a whole.
• Greater efficiency via a single product platform, which enables the simplification of the product set and has the potential for enhanced product features, are key benefits of our convergence programme which has been implemented over the past two years. Converging both Yorkshire and Clydesdale onto a single integrated core banking platform covers branch teller and sales systems as well as a back-office product processing system.
• By the end of 2006, the new teller system had been implemented in all Yorkshire branches and support areas, allowing legacy systems to be decommissioned. In April of this year, Clydesdale product processes and all supporting customer data were migrated to the new back-office platform and deployment of the new teller system is scheduled to be completed by the end of 2007.
• In addition to the investment in the technology infrastructure, a branch refurbishment programme has also commenced that will see the vast majority of branches benefiting from some improvement work over the next three years.
• The third party distribution channel continued to perform in line with expectations. The broker network maintained high lending quality, whilst the focus on offset mortgages helped increase customer penetration.
  Investment has continued in upgrading the two main Head Office locations, with the Glasgow upgrade now complete and Leeds well underway. This delivers a better work environment which fully utilises available space and is more energy efficient.
• Work to create two centres of excellence in back office processing in Clydebank (near Glasgow) and Leeds is nearing completion. Leeds now provides support to business lending, collection services and card service activities whilst Clydebank supports the branch back office. The concentration in two centres has helped improve productivity.
• During the financial period, Clydesdale issued £200 million dated subordinated debt under the NAB Group US$75 billion Global Medium Term Note Programme. This brings Clydesdale Bank's total outstanding senior and subordinated notes to £1.8 billion. Standard & Poors upgraded the credit rating of Clydesdale Bank to AA-, following a credit upgrade of NAB to AA.
• The Bank’s contact centre in Glasgow was named ‘World Contact Centre of the Year 2006’ in the prestigious Contact Centre World Awards. It beat competition from more than 1,000 entrants.
• For the third year running Clydesdale Bank was named the best mortgage lender in Scotland by Your Mortgage magazine. This success was followed by Clydesdale Bank and Yorkshire Bank being jointly awarded Best Offset Mortgage Lender 2007.
• The Count Me In flagship community education programme expanded and won the Scottish Arts & Business Community Award in October.
• Support continued for the British Heart Foundation raising over £360,000 whilst the launch of Give As You Earn, the payroll giving programme, resulted in 5% staff participation and over £75,000 pledged to various charities. An employee volunteering policy, offering two days leave per annum was launched in Yorkshire in February and extended to all employees in April.
• Key long-term sponsorship partnerships were strengthened through a four-year Clydesdale Bank multi-million investment in the Scottish Premier Football League, Scottish Commonwealth Games Team and backing the bid for the 2014 Glasgow Commonwealth Games.
• Supporting the transformation of the Leeds Grand Theatre and Opera North was recognised in the UK Arts & Business Brand Identity Awards.

Financial Highlights (movement on March 2006 half)

Cash earnings increased 22.6% (£24 million) on the March 2006 half, reflecting higher income, lower expenses and slightly lower charges to provide for doubtful debts.

• Net interest income increased 6.1%. This reflects the significant growth of the Financial Solutions Centres and third party distribution network despite a managed rate contraction and competitive pressures impacting interest margins. Strong underlying volume growth was partially offset by the changing portfolio mix under the growth strategy toward business lending and mortgages.
  • Average gross loans and acceptances increased 20.0% on the March 2006 half. Business lending volumes grew by 27.7% with the increasing maturity of the Financial Solutions Centres in the South of England and the work done to establish the fully integrated capability of the Financial Solutions Centres in the North. Continued focus on mortgage lending, primarily through third party distribution, has resulted in growth of mortgage volumes of 23.8%; 20.4% from integrated Financial Solutions. Credit card and personal loan balances declined by 5.0% over the year as part of the ongoing strategic plan to reduce exposure in this area.

     

  • Average retail deposit volumes grew 20.2%. This was driven by the continued momentum in the Financial Solutions Centres and the establishment of an international offshore branch in Guernsey in 2006. These were supported by obtaining a Fitch rating which opened up opportunities in the local government and university sector, and by pricing and new product development initiatives.

     

  • The net interest margin decreased from 3.68% to 3.16%. Within Lending, higher margin personal loans and credit cards have shown a decrease in balances while lower margin mortgage and business lending have shown strong growth. In addition, non-customer movements, including basis risk, have depressed the margin in the period.

     

• Other operating income has decreased 7.3%. However, after adjusting for the impact of Danske Bank A/S transitional service income in the prior half (£22 million, offset by decreased operating expenses), underlying other operating income increased 3.0%. Other factors were:
  • the increased income from Tailored Business Loans subject to fair value revaluations of £8 million;
    increased income from derivatives generated through management of interest rate risk positions on the balance sheet of £6 million;

     

  • gain on sale of “MasterCard” shares of £6 million; partially offset by
    sales proceeds of £6 million in the March 2006 half for the sale of the UK Discretionary Investment management business; and

     

  • a £9 million decrease in Wealth Management income. As a result of lower personal loan sales under the risk strategy and, in addition, as reflected elsewhere in the UK market, there were lower commissions for Payment Protection Insurance.

     

• Operating expenses have decreased 5.5%. Underlying expenses are flat after adjusting for Danske Bank A/S transitional service expense in the prior half (£22 million, offset by decreased other operating income). Other factors were:
  • £48 million of incremental savings in the current period from the restructuring initiatives provided for in the March 2005 half.

     

  • direct costs associated with the UK Growth Programme. These have increased by £32 million including the recruitment and ongoing costs of staff in the Financial Solutions Centres (233 additional staff recruited over the period), additional property associated costs, advertising and marketing costs and the full year effect of staff additions and property openings in the prior year;

     

  • other inflationary and indirect costs associated with growing a balance sheet (23.3% increase in average interest earning assets over the period) including variable back office processing and risk management costs, as well as annual salary increases.

     

• The charge for doubtful debts is broadly flat on the March 2006 half. Additional collective provision charge arising from the increase in business lending volumes has been more than offset by lower collective provisions in the personal loan and card portfolios as a result of improved arrears management, tightening of lending criteria and lower lending volumes. The specific provision charge has continued to be impacted by personal loan and credit card write-offs reflecting the deterioration experienced across the UK market.

The cost to income ratio of the business improved by 4.1% over the year, down from 62.7% to 58.6%.

Performance Summary - UK ongoing operations

Key Performance Measures - UK ongoing operations

* The September 2006 and March 2006 half year net interest spreads have been restated upwards by 19 basis points and 40 basis points respectively to reflect a change to the treatment of intracompany liabilities. There has been no impact to Group net interest spreads. The impact for the September 2006 full year was a restatement upwards by 30 basis points to 3.30%.

** Impaired assets consist of retail loans (excluding credit card loans and portfolio managed facilities) which are contractually past due 90 days with security insufficient to cover principal and arrears of interest revenue; and non retail loans which are contractually past due 90 days and there is sufficient doubt about the ultimate collectibility of principal and interest.

About the National Australia Group

An international financial services organisation providing a comprehensive and integrated range of financial products and services, NAB is one of the world's top 30 financial services companies and serves 8 million banking customers and over 2.3 million wealth management customers. Globally, the Group is organised around regional businesses - National Australia Bank in Australia; Bank of New Zealand; as well as Yorkshire Bank and Clydesdale Bank in the UK.

For more information:

National Australia Bank - NAB Group results are available on http://www.nabgroup.com.au/ (opens in a new window)
London Barry Gardner - 020 7710 1983 / 07789 171 614
Tony Friend (College Hill) -  0207 457 2020 / 07798 864 995
Glasgow Stuart Neill - 0141 242 4165 / 07767 788 765
Leeds Ewan McCulloch - 0113 247 2510 / 07713 265 532