CLYDESDALE bank’s finances have improved following its demerger from National Australia Bank but the Glasgow-based lender faces challenges, a prominent credit rating agency has said.

Moody’s said it had upgraded Clydesdale’s rating on one measure to reflect the bank's improved credit fundamentals following the finalisation of the demerger.

Clydesdale floated on the London Stock Exchange on Wednesday with Yorkshire Bank as CYBG after National Australia Bank off-loaded the business to international investors.

The flotation of CYBG, led by chief executive David Duffy, was delayed by 24 hours after a credit rating agency asked for information about Clydesdale. The agency was believed to be Moody’s.

In a rating report on Clydesdale Bank issued yesterday, Moody’s noted NAB had put in place an indemnity of up to £1.7bn to cover potential misconduct liabilities in respect of issues such as the mis-selling of Payment Protection Insurance by Clydesdale.

Moody’s said it considered the indemnity to be more-than-adequate for a bank the size of Clydesdale. It materially reduces the tail risks associated with further, unexpected conduct charges.

Moody’s also noted that Clydesdale underwent a capital restructuring in readiness for the demerger, which included a funding equity injection from NAB. This significantly strengthened the bank's solvency profile.

However, Moody’s said: “Clydesdale still faces long-term structural challenges from its weakened franchise and past challenges in its risk management framework.” The bank faces headwinds in improving its cost structure and restoring its profitability to a solid footing.

Moody’s cut Clydesdale’s long-term deposit and commercial paper ratings by one notch each. This reflected its view some creditors faced slightly higher risk of loss in the event of Clydesdale defaulting following changes in its funding mix, although they remain low.

A spokesperson for CYBG said the upgrade of its BCA rating reflected the improved credit fundamentals following the finalisation of the demerger.

He added: “CYBG 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."

Shares in CYBG closed up three per cent, 6p, at 198p. They listed on Wednesday at 180p.

Moody’s increased Clydesdale’s rating on the standalone baseline credit assessment rating to one applying to firms that it classes as medium grade and moderate risk from one applying to firms it considers to offer questionable financial security.

It downgraded the deposit rating one notch within the range applying to entities offering adequate security.