National Australia Bank's operations in Britain may be the focus of attention at the bank's annual results next week and all the indications are that the news will be bad.NAB limited detail made available on the operations at its strategy briefing last month and the material published raised more questions than it answered.Those familiar with the banking market in Britain have been surprised that NAB's mortgage portfolio and its commercial loan book appear to have been immune to the severity of problems besetting other banks. In fact, the message many analysts took away from the last two briefings was that the Clydesdale and NAB Europe business under Lynne Peacock had managed to escape the forces that had hit every other bank in that market. Several analysts reported at the time that the division was profitable and outperforming its peers.NAB said the business, which comprises Clydesdale and Yorkshire banks and NAB Capital, was resilient in tough conditions.NAB said that its funding costs had blown out and that the ratio of non-performing loans and gross impaired assets to gross loans and advances had increased to 164 basis points at December 31, 2008, up from 99 basis points at September 30, 2008. It said the worsening environment was expected to lead to further asset quality declines over the course of the year.However, NAB did not provide any information on the lending margins on its £12 billion of tracker mortgages, which track movements in the Bank of England's official base rate plus a margin. The base rate is now 0.5 per cent.An examination of financial results and forward looking statements released in the past few months by Barclays, HSBC Group, Lloyds Group and RBS suggest NAB's results for the half year to March will have to factor in a severe deterioration in the British economy for fiscal 2009.NAB has about 25 per cent of its loan book in Britain in commercial property lending. Matthew Davison at Bank of America Merrill Lynch has warned in a note that NAB's bad debts in the region will rise from 56 basis points in 2008 to 110 basis points in 2009.Barclays said in February that it expects loan loss rates to rise 130 to 150 basis points in 2009, and 2010 will be much the same. It said impairment charges for its commercial lending rose 42 per cent in 2008.Loss rates on commercial loans at HBOS have been as high as two per cent.NAB said in February that revenue was softening. That trend has probably accelerated, according to the latest Bank of England credit statistics.Credit growth in Britain fell off a cliff in the December quarter and is now experiencing the worst decline in 50 years.NAB's mortgage book is a cause for concern. Davison estimates that about £9 billion of the tracker mortgages on NAB's books are to small business customers.Small business is being hit hard by the recession.At the RBS Group small business non-performing loans have been rising at about £1.5 billion a month for the last