Analysis: Major bank’s ‘torturous and expensive journey’

On 27 November, the NAB board formally decided to proceed with the demerger and proposed IPO to institutional investors of Clydesdale and Yorkshire Bank (CYBG).

On 8 December, the major Australian bank said the demerger would facilitate a strong focus on its core Australian and New Zealand franchises.

Following the demerger, NAB will have limited funding and capital exposure to CYBG Group.

Morningstar analyst David Ellis endorsed NAB’s decision in a research note this week.

“NAB confirmed its intention to demerge 75 per cent of Clydesdale to existing eligible NAB shareholders and sell the remaining 25 per cent by IPO to institutional investors,” Mr Ellis said.

“We endorse the action of the board and CEO Andrew Thorburn in exiting the United Kingdom, and we are pleased that the end is finally in sight, as it has been a torturous and expensive journey for NAB shareholders.

“NAB shareholders have waited a long time for the UK exit, and should be rewarded with higher returns on the more profitable Australian and New Zealand franchise.”

While local reports have tended to focus more on NAB and less on Clydesdale, an ASX update and investor presentation provided a comprehensive overview of a UK bank that puts mortgage brokers at the heart of its business.

Clydesdale will continue targeting growth in mortgages, and in fact has experienced four years of above market growth in residential lending. Home loans represent more than 70 per cent of Cyldesdale’s loan book.

The company has a national reach through brokers, however 48 per cent of its mortgage book is concentrated in London and the South East.

Brokers play a key role in the UK mortgage market. The latest figures from the Council of Mortgage Lenders put broker market share at 64 per cent, with many UK mortgage market figures tipping 75 per cent as a realistic target for 2016.

The UK regulator introduced the Mortgage Market Review (MMR) in April last year, which worked in favour of brokers in much the same way the APRA’s lending curbs are driving more borrowers towards the third-party channel in Australia.

In its investor presentation this week, Clydesdale made no secret of the fact that brokers are the primary distribution channel for home loans in the UK.

“Benefits of the intermediary model to banks,” it stated, include “broad geographical distribution, scalability at low marginal cost and improved asset quality."

“Benefits of the intermediary model to customers," include “face-to-face advice, application processing support and access to a wider range of providers, allowing customers to shop for best deal.”

“New rules following the Mortgage Market Review (MMR) in 2014 are supportive of intermediary market dynamics,” the group said.

Specifically, the bank noted that increased regulation had also increased processes for in-branch mortgage applications, driving a “re-direction” of flows to the intermediary market.

Clydesdale has a selective “invitation-only” panel of brokers who write 74 per cent of new volumes.

Other UK banks have an even greater dependence on brokers. Aldermore Bank receives 88 per cent of all new lending from brokers while Virgin Money receives 87 per cent.

Increased regulatory supervision of the UK mortgage market has been a windfall for brokers. With global regulation showing no signs of slowing down, and APRA firmly on the front foot when it comes to responsible lending, Australian brokers are likely continue to dominate the home loan market.