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Clydesdale creates a new mood for banking

Terry smiling headThere must have been some frayed nerves at Clydesdale Bank HQ in Glasgow last week as the team in charge of leading it into a new era of independence awaited word from Melbourne on some last minute hitches in the flotation timetable.

Just hours before the issue price was due to be announced last Tuesday, word came through that Moody’s, the credit rating agency, wanted more information. Some frantic calls were made to investors around the world to provide reassurance that the plan was still on track.

In the end, the offering of the newly-titled CYBG, which includes Yorkshire bank, took place 24 hours later, though with the markets in such a state of panic it is a wonder it got away at all.

In the US there were no flotations in the whole of January while the UK raised a miserly £8 million from just two issues. Therefore it was easy to understand how investors would question if National Australia Bank’s long-mooted disposal of Clydesdale  and Yorkshire banks, grandly known as NAB Europe, would be pulled.

Virgin Money faced similarly difficult market conditions when it first planned to float in October 2014.

Virgin shares since flotation

Virgin shares since flotation. Source: LSE

As with Clydesdale, Virgin was offloading 25% of its shares and was valued at a about £2 billion. It finally got away with a price tag of £1.25bn. Clydesdale began trading last Wednesday at £1.58bn.

So, what of the future?

Bank shares, once a solid addition to any portfolio, have not been popular since the crash and there were warnings last week that shares in RBS could plummet further, raising more doubts about the government’s hopes of getting it back in private hands.

A planned  £2bn public issue of Lloyds Bank shares was withdrawn by the Chancellor last month because of the global stock market turmoil. After clawing back £16bn of the £20bn of taxpayers’s money poured into the bank in 2009, George Osborne had hoped that offering shares in a privatisation-style issue would help make up the gap and give him some political kudos for having repaired the damage done under the Labour government. It has been revealed this weekend that Barclays has been appointed to get the issue back on track.

As for the challenger banks, Shawbrook, which was brought to market by former RBS chairman and chief executive Sir George Mathewson, is reckoned to be among the better bets. Analysts at Credit Suisse like its avoidance of commoditised lending and say it is diversified across  SME and consumer lending. It also has a strong capital position. Of the others, there are concerns about those which are too exposed to sectors such as buy-to-let, including OneSavings Bank.

CYBG’s shares got off to a good start, closing the week at 207p, a healthy premium on the 180p issue price. Private investors will get their chance to buy shares from tomorrow but should watch for any profit taking by institutions which may see the price fall.

While direct comparisons with rivals provides some obvious guide to performance, they should also be treated cautiously. For what it’s worth, Virgin shares, floated at 283p in November, peaked last June at 454p and now trade at 305p. With Virgin in good shape and with no known skeletons in its locker to worry investors, it seems the wider market offers better guidance. Last summer’s spike came just a couple of months after the FTSE100 hit an all-time high, while the current price reflects the general slump.

What has most caught the eye at Virgin in recent weeks has been the hiring of Peter Bole as chief financial officer from Edinburgh rival Tesco Bank. His £3 million pay and bonus package prompted a few raised eyebrows, but clearly indicates the scale of Virgin’s ambition. It was one of the biggest signing-on deals in the city and Virgin was clearly keen on getting its man, given that he won’t take up the post until next year.

David Duffy

Clydesdale has been adding to its own team, led by the former Allied Irish Banks CEO David Duffy. Just ahead of the flotation it hired David Bennett, former chief executive of Alliance & Leicester, as deputy chairman. Also on the board is Aegon UK chief executive Adrian Grace.

The bank has regained its independence for the first time since it was acquired by Midland Bank in 1920. To do so in difficult market conditions must indicate confidence in its underlying business model. This was helped by NAB agreeing to provide £770m to cover misconduct costs, including payment protection insurance compensation.

The concern expressed by Moody’s related mainly to the increased risk resulting from the removal of this financial crutch. Given that NAB was unimpressed by the performance of its UK banks and the UK banking sector in general, this is bound to be a factor in measuring CYBG’s short to medium term prospects, both in terms of performance and its ability to remain independent.

CYBG defended its position, stating that it “does not consider the downgrade of the long-term deposit and commercial paper rating to have any material impact on its or the bank’s ability to raise funding, the overall cost of funding or the financial outlook for CYBG or the bank.”

Mr Duffy said last week that it enters 2016 believing it can build and invest without having to depend on decisions by third parties (aka NAB). Expect this “local” decision making to play a big part in its promotional campaigns.

Clydesdale, of course, is different to the other “challengers” not least because of its longevity. It is also much larger. Together with Yorkshire Bank it has 2.8 million customers and 275 branches. This gives it a fighting chance, although the same was said about TSB.

Creating more competition among banks has been a stated ambition for the UK government. The acquisition of TSB so soon after its demerger from Lloyds, and the decision by RBS to run a twin-track sale and IPO process for Williams & Glyn, shows how the bigger chickens will continue to rule the roost.

 

 

 

 

 

 

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