Duffy will take over as CEO at National Australia Bank's Clydesdale Bank within the next few months, NAB said, as it looks at ways to leave Britain after years of poor performance and high charges to compensate customers for mis-selling.

The announcement comes just a week after the Irish government appointed advisers to kick off the sale of its AIB shares. Duffy joined AIB at the end of 2011 and has guided the 99-percent state-owned bank back to profit.

NAB, Australia's fourth-biggest lender by market value, said in October it had made an exit from Britain an "absolute priority" and was looking at options including a sale or initial public offering.

Duffy will need to get the business into strong enough shape to attract investors in an already crowded market.

Virgin Money, TSB and OneSavings Bank listed last year and the British government is also selling its shares in Lloyds Banking Group.

Clydesdale's appeal to investors has been hit by he cost of writing off property loans which turned sour and charges for mis-selling loan insurance and complex hedging products.

"It does need a tidying up and presenting in a better form. It's not as though investors don't have choice in terms of picking up challenger banks," said Shore Capital analyst Gary Greenwood.

SALARY GAP

NAB paid 420 million pounds for Clydesdale Bank in 1987 and 900 million pounds for Yorkshire Bank three years later.

The business has around 300 branches and industry sources say it provides 2-3 percent of small business lending in Britain and about three percent of personal current accounts.

Duffy will remain in position at AIB to support the board in identifying his successor with his final departure date to be agreed, the bank said.

Ireland's finance minister, Michael Noonan, who last week appointed Goldman Sachs to advise on the sale of AIB, said Duffy would leave the bank in about six months and that he would consult AIB Chairman Richard Pym in the coming days to put in place a process to recruit a new CEO.

Noonan said if Duffy had stayed for the next phase of the bank's recovery, it would have meant another 4-5 years and "that level of commitment was too long" for him.

Bank executives in Ireland are subject to a government-imposed salary cap of 500,000 euros (384,000 pounds). Duffy took a pay cut as part of bank-wide wage reductions, reducing his salary to 425,000 euros last year.

Duffy's predecessor as Clydesdale chief executive David Thorburn, who quit earlier this month, was paid an annual salary of 955,000 pounds. The bank declined to comment on how much Duffy would be paid.

The appointment of an adviser last week marked a stepping stone in Ireland's bid to begin to recover the 21 billion euros spent on rescuing the country's second-largest bank by assets. No transaction is expected until the second half of 2015

Noonan, who believes the state can recover the full amount over time, said he did not expect the resignation to damage those attempts, although Merrion Capital analyst Ciaran Callaghan said the timing was likely to be an unwelcome development in the sales plan.

Ireland increased its valuation of its AIB investment to 13.3 billion euros at the end of last year, meaning it will need to sell the bank at a significantly higher value to break even.

(Additional reporting by Steve Slater and Conor Humphries; editing by Jason Neely and Keith Weir)

By Padraic Halpin and Matt Scuffham