For Cameron Clyne, and his colleagues at National Australia Bank conducting its strategic review of its UK banks, Wednesday’s UK budget would have made depressing reading.

The bottom line to the budget was its forecast of meagre growth of 0.8% this year, rising incrementally to a modest 3% by 2015. The seven-year austerity program being pursued by the UK Chancellor George Osborne doesn’t auger well for a return to more positive conditions for UK banks any time soon.

Clyne announced the review in NAB’s latest quarterly update last month, saying it was now clear that the UK economy was going to experience a much longer period of subdued growth and that the difficult conditions in the UK were adversely affecting the performance of its UK banks.

Until last month NAB had held a very consistent position on its UK operations. It had a “buy, sell or hold” strategy — it was a potential buyer of UK bank assets at the right price, or a seller of its banks at the right price, but was equally prepared to simply hold its course. The market was reasonably comfortable with that position.

The February announcement sowed some confusion, generating speculation that a potential outcome from the review was a NAB exit from the UK.

Given that a sale in the current conditions would probably generate a loss approaching $2 billion, that wouldn’t appear a sensible option for NAB. With the market factoring in little, if any, value for the $4 billion or so NAB has tied up in the UK (it’s probably more, given that it has shipped in more than $2 billion of capital to shore up its UK balance sheets since the global financial crisis erupted) a sale, however, even at a big loss, would probably create sharemarket value for the group.

A sale in the current environment isn’t the most likely option. The February disclosure of the review said NAB would work with its UK management to “appropriately reposition” its business mix and structure for the changed economic circumstances.

NAB’s UK banks are well run and its retail bank has performed well in the difficult environment. It is its business banking exposures, and most particularly its exposure to commercial property, that is the problem within a weak market for commercial property and one that is likely to remain difficult for years given the absence of economic growth.

NAB could stop lending against commercial property and quarantine its commercial property book, creating what might be termed a “bad bank” and putting it into run-off.

While that might reduce the risk within the UK operations over time, and reduce the risk that NAB might have to ship over even more capital from Australian operations that generate a respectable return on capital to a low-returning jurisdiction — indeed it might release capital from the UK — the external environment means that could be quite a bloody business. All the UK banks are trying to do similar things.

Perhaps the messiness of the run-off option might bring a sale back into play. Last year a UK cash box, NBNK, which was set up by a consortium of powerful financial backers to acquire UK banking assets, tried to put something of a bear-hug on NAB by promoting speculation about a deal under which NAB would vend its UK banks into NBNK for mainly equity and NBNK would then buy the portfolio of Lloyds branches that were then on the market.

There are several similar vehicles in the UK (they used to call them vulture funds) set up to participate in the forced divestment of branches and customers imposed on some of the big UK banks that were bailed out by taxpayers.

Their problem is that they don’t have the banking technology platforms, people or skills to actually manage major banking operations, which is why the notion of acquiring NAB’s Clydesdale and Yorkshire banks and their existing infrastructure — and a continuing relationship with NAB — would have been appealing to NBNK. It wasn’t so appealing to NAB, however, which wasn’t enthusiastic about a messy partial sell-down that still left it with a major UK exposure.

NAB will report the results of its strategic review with its interim results in May. Having raised expectations of something substantial, the group will have to deliver some plan for material change and improvement in the profile of the UK banks.

Because there is probably no value attributed to those banks in NAB’s share price — there are some who say the market is implying negative value for them — Clyne could do something reasonably dramatic and make some major write-downs to make it easier to clear his books of the lowest quality of the group’s commercial loan portfolio.

NAB’s announcement yesterday that has taken action to remove the economic risk of its remaining two synthetic collateralised debt obligations, hedging them and raising a $160 million provision against them so that there will in future be no mark-to-market gains or losses flowing through its earnings numbers, suggests Clyne is in a mood to clean house.

While the eurozone crisis appears to have receded, thanks to the trillion euros of liquidity that has been pumped into the eurozone banking and financial system, the reality in Europe is that nothing structural of significance has yet been achieved — the crisis has been deferred, not resolved.

While the UK does have an aggressive strategy for bringing its debt and deficits under control, even in the more optimistic scenarios there will be no near term bounce-back and it remains exposed to the potential for implosions within mainland Europe and the potential splintering of the eurozone.

Clyne has a window of uncertain dimensions within which to sort out the future of NAB’s UK banking presence. Having decided he can’t out-wait the crisis and the years of austerity that are the best-case aftermath, Clyne will know that he has to deliver something concrete and convincing if he is to meet the expectations he created last month by revealing the review.

*This article was first published at Business Spectator