WHEN JOHN Stewart took over as group chief Executive of the National Australia Bank group (NAB) in January 2004, he was shocked by the state of the business. Its Scottish subsidiary, Clydesdale Bank, was a basketcase on the verge of ruin, after years of under-investment. And this was long before the days of UK government bailouts.

Now, nearly five years later, as he prepares to step down in January, Stewart says NAB is one of the best in the world. Glasgow-based Clydesdale has been restored and revitalised, and is probably the UK's best-performing bank. In all, it's a remarkable transformation, and just in time as the UK faces the toughest downturn since the end of the second world war.

"There is a serious financial crisis going on right now the likes of which we have never seen in our lives," says Stewart, sitting in the Clydesdale Bank's financial solutions centre in Edinburgh. "I've never seen debt markets closed like they have been in the past 12 months. I've never seen what I consider top-class banks getting themselves into this problem. This is only the first wave. There will be $1.4 trillion of write-downs from the banking sector, and this is going into the real economy, so that's going to be very severe."

Stewart is a down-to-earth Scot who knows about tough times, and not just because he's a Hearts fan. Born in Edinburgh, he lived in a shabby tenement in Gorgie Road, where on match days he could hear the roar of the Tynecastle crowd. He attended Dalry Primary and Boroughmuir secondary school before joining the Woolwich, where he met his wife, Sylvia, a Leith girl.

"My father was a motor mechanic and we were poor. I was never allowed to say this when my mother was alive because she would be offended, but we lived in a slum with a toilet along the corridor shared with other families. From that upbringing, you learn to appreciate things and work quite hard," he says.

Stewart eventually became chief executive of the Woolwich, bought in October 2000 by Barclays. It was the creation of WIFAS - a financial advice subsidiary inside the Woolwich - which earned Stewart and his long-time colleague Lynne Peacock their spurs. And it set a tone for their future working relationship. They were both in their thirties and wrote down the kind of company that they wished to work for, then set about creating it. WIFAS was a startling success, increasing its profits by 35% compound for a decade. Stewart was Woolwich CEO for a year before moving on.

Some of the best decisions were the businesses that they didn't start. He says a lot of management is avoiding the things that go wrong. "Thank goodness, for that. You never get the credit for the bullets that missed, but one of the reasons I ended up as CEO of the Woolwich was creating these companies and being successful.

"I'm not a technical banker. I don't want to be a banker's banker. I'm essentially a people person, so it's customers first and it's staff. I have spent my whole career getting good people around me, and they do well and I get promoted."

When Stewart arrived at NAB things were in a bad way. "Quite frankly, they weren't good people and that's not what I wanted to find. I only wanted to come in for a short time and find great guys and say: Yes, fine, you take over and I'm going home.'" Then it went from bad to worse, with a boardroom battle which taxed Stewart's good humour. He wondered what he had let himself in for.

"I'd decided that I was only going to be there for a year. I arrived in Australia at the end of January but when May came I realised all of the companies were in a shocking state. I had 40,000 staff. I realised the management weren't every good, but the bankers - the workers - were fabulous and so were the customers. If I just walked out on this I'd have been doing the same as everyone else."

He spoke to his wife, Sylvia, and told her he couldn't leave until it was fixed. So they moved from Kent to Melbourne, and Stewart brought in Lynn Peacock, who is now head of the UK operations.

Stewart had to make changes to the UK and Irish subsidiaries - Clydesdale, Yorkshire, Northern Bank, in Northern Ireland, and National Irish Bank - which were in a bad way. "I couldn't believe the state the bank was in. Clydesdale hadn't been invested in. There was almost a chief executive a year for 10 years."

He says that the UK strategy from Melbourne was to buy itself out of the problem. So NAB didn't invest, and planned to take over someone like Abbey National and buy the new systems and slam them together. "But the trouble was, the big deal never came."

Stewart quips: "I sent Lynne back to the UK, which was a bit of a misjudgement on my part. Up until that time, she had been my number two for 20 years and she had done all the work and I took all the credit. It worked a treat. But when I sent her back to Britain, she was 12,000 miles away, doing a great job. I should have worked that one out a bit better.

"She has taken the worst bank and made it one of the best in Britain. She has fabulous staff around her, people like David Thorburn, our chief operating officer in Glasgow."

There was constant speculation about Clydesdale being up for sale, but Stewart and his team got on with repairing, and thought if a deal came along, that would be a bonus. Meantime, they sold the two banks in Ireland to Danske Bank.

Along from Peacock, others, including Steve Reid, Mike Williams and Ian Smith, joined the battle. "I had to get fresh talent in. We had a bad culture; a culture of relating good news but nobody would tell me the bad news. That's not healthy. There was no accountability and committees decided everything so you couldn't nail anyone," he says.

Stewart and Peacock introduced a series of expected behaviours which are now embedded in the business. A system known as the Behaviour Gate with green, yellow and red cards determines bonuses and whether you stay with the bank.

Hundreds have been shown the red card over past four years - but the culture is much more focused on delivering for the customers, maintains Stewart. "We love small business. We are first and foremost a relationship bank, not too interested in transactions.

"We're the biggest agribank in Australia, yet during the last big drought in 2002 we foreclosed on only one farm - because we have specialist lenders helping our customers through the downturn. That's the way we run in Scotland too. This has a huge benefit on the bottom line," he says.

Yet NAB is not immune to the global downturn and wrote off $A1 billion of assets, but Stewart says this is chicken-feed compared with the wider picture.

"If you take that out, all of our businesses are best in class. Our Australian business is looking fabulous, so is our New Zealand bank. It's the same in the UK and with wealth management and institutional banking. All are better than our peers. That's the turnaround - but this is all down to the people."

A keen sailor, Stewart uses a sailing metaphor to describe how NAB will face the hurricane of the global financial crisis. "We've spent four years getting our boat up to race speed and it's starting to win races. But now, I'm not interested in the race - it's batten down the hatches. I'm interested in keeping the boats and the crew safe."