National Australia Bank – 30 years of strategy failure

In its first quarter results this month, the National Australia Bank (NAB), breathed a sigh of relief announcing that the “separation” of Clydesdale had been “successful” with an expected loss of approximately A$4.2 billion. Though the final number for the loss might be a little larger, the “demerger” of Clydesdale/Yorkshire Bank (CYBG) actually marks the end of a 30-year strategy of overseas expansion by NAB.

NAB’s “growth by overseas acquisition” strategy gives a rare opportunity to look at a corporate strategy over a very long period (almost 30 years) and while the strategy cannot be termed a catastrophic failure it was far from a roaring success. So why did NAB’s board persist in what was, for a very long time, a losing strategy?

The study of “strategy” usually involves looking at a successful company and trying to determine the reasons for its success. The rationale is that if one is smart enough to discover the reasons then those secrets can be packaged into a recipe which anyone can copy and therefore everyone benefits. Sometimes it works, sometimes it doesn’t – there are few Apples or IBMs, but there are many RIMs (makers of Blackberry – whatever happened to that firm?).

There is an old saying “Success has many fathers but failure is an orphan”. And typically when a strategy fails, such as that of Woolworths and Masters, the immediate reaction is to dump all of the blame upon the unfortunates who happen to be in charge when the bad news is finally given. [Here “unfortunate” is relative as there is quite often a payoff to cushion the blow, which is rarely unexpected anyway].

Henry Ford was one of the many business, political and military leaders who knew the advantage of failing, in that failure gives one the opportunity to learn

“The only real mistake is the one from which we learn nothing.”

So the study of strategy can benefit from considering failures and attempting to learn from them.

In the mid-1980s, Australia was a different country, not least one where a government could undertake major economic reforms without “bed-wetters” derailing it. By 1985, the Hawke Labor government (building on work started by the previous Fraser government) had floated the Australian dollar, deregulated the banking system and permitted 16 foreign banks to set up shop in Australia.

And following Australia’s win in the Americas Cup in 1983, there was an optimism that Aussies could compete as equals in the global economy. It was (until now?) the most exciting time to be an Australian businessman/person.

In 1987, the country’s largest bank, the National Australia Bank, headed by the combative executive director of banking and later CEO, Don Argus, sallied forth and bought the Clydesdale Bank, the Northern Bank in Northern Ireland and the National Irish Bank in the Republic of Ireland. NAB acquired these “Celtic Fringe” banks from one of the largest banks in the UK, Midland Bank, which, as a result of a failed expansion strategy into the USA, was under pressure to dispose of some assets in a fire sale. Surely NAB could do better than that?

In 1990, NAB ventured into England and purchased the Yorkshire Bank, a 120-year old bank headquartered in Leeds. The overseas expansion strategy continued and, in 1992, NAB acquired the Bank of New Zealand (BNZ) and in 1995 acquired the US based Michigan National Corporation (MNC), the bank’s first foray into the US market.

NAB was on a roll and, in its 1997 annual report, flushed with success the bank announced its vision was to be “the world’s leading financial services company” and it was continuing its strategy of “growth organically and through well considered acquisitions”. The board noted that the foundation for a “new phase” had been laid, especially creation of a “core processing centre [to be set up in Melbourne] to service all of its European banks”. Recognised as being a leader in technology, NAB also announced plans to develop online banking capabilities in Australia and New Zealand and telephone banking services in the UK and USA.

But overseas acquisitions were far from finished and, in 1998, NAB acquired HomeSide, Inc., at the time one of the largest mortgage servicers in the United States. The board had “identified considerable value from the application of HomeSide’s proven capabilities and systems”. In what was to be the first implementation of its so-called global “Product Productivity” strategy NAB noted that:

“HomeSide will continue to build its profitable business in the United States while introducing its proprietary software and management practices across the Group – starting with Australia. In the process, HomeSide will create the first of the National’s global product specialists.”

So as the century came to a close, thankfully without the armageddon prophesied by the Y2K bug, NAB was well-placed to grasp the opportunities of the 21st century. But it was to chart these new waters without its charismatic CEO Don Argus, who had announced in 1999 that he was jumping ship to become chairman of BHP Billiton, the world’s largest mining company.

There could not be a better time than 2000 to have a stocktake. What had NAB achieved in its 15-year quest to become the world’s leading financial services company?

Less than one might imagine. The banks that had been acquired were peripheral in the markets in which they operated, Scotland, Ireland and Michigan rather than in London or New York. In particular, Clydesdale remained a second tier bank, while its Scottish counterparts, the Royal Bank of Scotland and the Bank of Scotland, were growing manically, of course heading for a spectacular crash in the global financial crisis. Maybe NAB was lucky to dodge that bullet.

The bank’s idea that it could service this small but widely dispersed set of overseas banks from Melbourne was naïve, based on the assumption that a bank account was a bank account and a mortgage was a mortgage everywhere in the world. The bank was about to be disabused of this misconception in a few years, with the disaster that became Homeside.

It should be noted here that the acquisitions of BNZ and later in 2000 of MLC Life Limited (the insurance and investment arm of Lend Lease) should not really be seen as part of the bank’s international growth strategy but a reaction to the other large Australian banks acquiring local insurance and investment companies to become what are known as “universal banks”.

But the Millennium was the peak of NAB’s overseas adventures.

In 2000, NAB disposed of MNC to the large Dutch bank ABN-AMRO posting an accounting gain on the transaction of some US$1 billion, for a small “win”. But having spectacularly failed to understand the complexities of the US mortgage market, NAB was forced to offload its Homeside operations in 2002 booking a loss of over US$2 billion on the sale. This loss more than wiped out the smaller gain on MNC making the expansion overall into the USA a loss-making strategy for the bank.

In 2004 under new CEO, John Stewart, NAB agreed to entirely exit its Irish banking operations selling both the Northern Bank, and National Irish Bank to the Danish Danske Bank Group, booking a profit of just over A$1 billion on the transaction.

In 2005, the board restructured the UK operations subsuming Yorkshire Bank into the larger Clydesdale, “in order to reduce associated corporate and support infrastructure costs,” leaving Clydesdale as the only NAB bank remaining in Europe.

In a rush of blood to the head, NAB returned to the acquisition trail in 2007, acquiring the US privately held corporation Great Western Bancorp (GWB) for just over A$ 1 billion. The reason given was a potential match with one of NAB’s strengths in the Australian market - its leading position in lending to agribusiness.

The timing couldn’t have been worse, GWB was bought just as the global financial crisis heaved into view.

In 2009, the GFC began to hit home and NAB reported a significant drop in net after tax profits (- 42%) mainly due to charges for increased doubtful debts, especially in the UK, and investment losses in the MLC business. And, very quietly, the new CEO, Cameron Clyne, announced a change in the focus of the firm’s strategy – to concentrate on Australia. The beginning of the end.

But it is sometimes much easier to get into something than get out of it. In 2011, the board announced that provisions had been set aside to cover claims against Clydesdale for mis-selling of Payment Protect Insurance (PPI) contracts and also announced credit rating downgrades not only on Clydesdale but also the bank itself.

In 2015, after first trying to float GWB, NAB sold it, booking a loss of A$67 million on the sale. This left only Clydesdale. After announcing in 2014 that the bank wished to sell its last remaining overseas acquisition, NAB eventually managed to offload Clydesdale in 2016 with a loss expected to be some A$4.2 billion.

With that, NAB’s overseas adventures were finished (at least for the time being).

With hindsight, NAB’s overseas acquisitions (with the exception of BNZ) were opportunistic rather than strategic, the corporate equivalent of a “quick pick” on the Melbourne Cup. Banks were acquired for little reason than they had come up for sale and were disposed of when the going got a little tough. The acquired companies were peripheral rather than major players to the markets in which they were operating and added little to NAB’s successful Australian businesses.

The bank never got close to achieving its goal of being the “world’s leading financial services company”. Hubris trumped by reality.

But it is not only NAB that is appearing to have second thoughts about international expansion. In January, the new CEO of ANZ Bank, Shayne Elliot, appeared to wind back the bank’s Asian ambitions championed by his predecessor Mike Smith, stating that rather than focusing on targets for the contribution of Asian earnings, he would favour a “back to basics” approach, concentrating more on Australia and New Zealand.

Where do these retreats leave the much vaunted ambition for Australia to become a “financial hub” for Asia? Pretty much back at square one.

However, that may not be a bad thing for Australian investors. The recent Financial Services Inquiry (FSI) recommended that Australian banks must be “unquestionably strong” to ensure survival in volatile (if exciting) times. A little bit of tending to the home front for the next few years might not be such a bad thing.