The bank that found it 'couldn't shoot straight'

NIB's woes are dwarfed by upheaval at its parent, writes Siobhán Creaton, Finance Correspondent

National Australia Bank's (NAB's) new chief executive, 53-year-old Mr John Stewart, has begun to take up the cudgels at the often arrogant and decidedly accident-prone bank. After three years of crisis, Australia's biggest bank is drained of morale and desperately needs to reassure its investors and staff that it is entering a more sure-footed phase.

Mr Stewart has spent his banking career in Britain and led the conversion of the Woolwich building society to a public company and its subsequent sale to Barclays, where he was offered the deputy chief executive's role. There were suggestions that he was unhappy at Barclays and last year announced his retirement. He explained that, after 37 years as a banker, he wanted to have "more fun".

But then his good friend, NAB chief executive Mr Frank Cicutto, rang to ask him to fix its British and Irish banks, which include National Irish Bank (NIB) and Northern Bank.

"Frank approached me and he said: 'I know what gets you up in the morning; you like building things and creating things and I have four banks and I need someone to put them together.'"

Mr Stewart said in interviews with Australia's business press: "I thought it would be great fun because it was the biggest development opportunity in the UK, not the biggest bank, but if you want to actually go and run a big bank, that is fine, but it is not for me."

By 2004, NAB's investors and the Australian press had had enough of Mr Cicutto. Last month, the news that four of the bank's foreign exchange traders had cost it 360 million Australian dollars (€220 million) was the last straw and they called for Mr Cicutto's head.

The pressure furiously mounted with investors openly castigating Mr Cicutto for reigning over three disastrous years. One broker was quoted saying that, under Mr Cicutto, NAB had developed a reputation in the financial markets as "the gang that couldn't shoot straight". The most memorable attack came from Mr Brian Johnson, a well-respected banking analyst at JP Morgan, who catalogued the "14 evil sins" NAB committed on Mr Cicutto's watch.

It had started with the Aus$4 billion losses at its US mortgage processing business, HomeSide. After that, NAB regularly lowered profit expectations, its provisions for bad debts grew weaker and it undertook a Aus$600 million investment in a software project that was a disaster.

The bank was left with bad debts of Aus$132 million following the collapse of a bus company. A rogue employee in South Korea who had been issuing fraudulent certificates of deposit cost the bank another Aus$77 million.

Mr Cicutto followed this with a botched Aus$10 million hostile takeover of Australian wealth management and life assurance company AMP, last August. The bank also had to cough up Aus$46 million to cover a funding hole in its European pension funds.

Mr Johnson said the renewal of Mr Cicutto's contract to 2006 with the potential to pay him Aus$10 million a year was NAB's 11th sin.

The deteriorating performance of its UK banks and the recent trading fraud were numbers 12 and 13.

And number 14? "The fact that we have been able to highlight 13 'evil sins' in three years highlights the poor performance of NAB," Mr Johnson explained.

Mr Cicutto's position had become untenable and, when he resigned, the bank's board of directors turned to his friend, Mr Stewart, to restore some order. The Scotsman claims to be a reluctant emigrant. When asked if he had wanted the top job in Melbourne, he replied: "No, I wanted to work for Frank, I wanted Frank up there."

On February 2nd, his first day in the top job, Mr Stewart acknowledged the bank's poor performance and began to soothe the malcontents. "This is a very famous bank but I think it is fair to say that it maybe hasn't been fulfilling its potential. If I understand the issues properly, I can work with both my executive and my board colleagues to come up with a strategy that will do two things. One is to create sustained growth. The second one is to restore pride to this organisation, which should be rightly one of Australia's finest institutions."

He confessed to the Australian Financial Review that he was perplexed that a bank, which from the inside seemed to be running smoothly and had good people, was perceived from outside as arrogant, out of touch and accident-prone.

"What seems to happen is that there's a perception, from lots of quarters - enough quarters that there has to be reality in it - that the organisation can be seen as arrogant and, more importantly, doesn't listen."

He pledged to get to the bottom of this issue. He said he is in "listening phase" and will give his critics a hearing.

NAB's staff and investors are also listening intently to Mr Stewart's every utterance. The early indications are that they are heartened by his comments and demeanour and that staff at its UK and Irish banks feel reassured by his presence in Melbourne.

In Europe, there has been a great deal of uncertainty about the fate of its UK banks - the Clydesdale in Glasgow and Yorkshire Bank in Leeds - and about its Irish businesses.

Mr Cicutto is best-known for claiming that Scotland had been "in permanent recession for the past 200 years", which gravely upset his staff and customers.

The then enterprise minister, Ms Wendy Alexander, called him a "gnome", and the subsequent backlash from Scottish business groups and politicians forced the Australian to make a grovelling apology.

Mr Stewart, who is described as affable and assured, is popular with his colleagues within the UK and Irish banks and is a total opposite to the painfully shy Mr Cicutto. One source at NIB said Mr Stewart's appointment had done wonders to boost morale amongst its 700 staff.

The bank's strategy in the UK and Ireland has been unclear for some time. NAB hasn't participated in the wave of consolidation in either market and seemed confused about just what to do with this part of the business.

Last Friday, Mr Stewart said he would consider selling these banks if such a move would create shareholder value - something that they may not have been banking on. But he added that developing the banks would create the most shareholder value at the moment, suggesting there will be no immediate disposals.

NIB's staff have weathered their fair share of tough times, maybe more than other NAB employees, and have suffered for a range of their own "evil sins", which included overcharging customers and assisting others to evade tax by promoting unauthorised offshore investment schemes.

This week, one of its most high-profile former employees, the Fianna Fáil Dáil deputy Ms Beverly Cooper-Flynn, reminded the public of its past sins. NIB headhunted her to work as a financial adviser in 1989 and she enjoyed a very successful career there, attracting new customers to invest in a range of its products.

In a statement read to the Dáil, Ms Cooper Flynn detailed the central role she played in advising and organising an offshore investment for her parents, Pádraig and Dorothy Flynn, six weeks after she joined NIB, the proceeds of which was subsequently put into a non-resident bank account. She has insisted that she had not facilitated tax evasion.

NIB's problems in the Republic began in 1998, when RTÉ exposed that, in the late 1980s and early 1990s, the bank had been imposing improper interest charges on customers at certain branches. It also exposed the fact that NIB had been selling unauthorised offshore investments in bonds issued by the Clerical Medical International group.

The allegations triggered a raft of investigations and the High Court inspectors appointed to examine these allegations have still to conclude their work. The bank was also identified as having offered bogus non-resident accounts to its customers and faced a multimillion euro bill from the Revenue Commissioners.

So far, these transgressions have cost NIB €40 million and it is likely to face further costs. During the past three years, its executives have also been trying to restructure the bank and to expand its business here with some success.

Everyone within the NAB group is looking to Mr Stewart to navigate a steadier course. Mr Stewart suggests he may be able to draw on his experience at the Woolwich in dealing with the current hiatus. "When I took over at Woolwich, the chief executive had been sacked and we had the same thing in the sense that the reputation of the organisation had suffered. Whether this will be relevant, I just don't know."