NAB to exit UK?
Looking at the situation from Melbourne, the logic about exiting the UK is clear for all to see. As the UK Government goes out of its way to make it more expensive and less profitable to operate as a retail bank, with the situation only deteriorating with the publication of the Independent Commission on Banking (ICB) recommendations, banks across Europe seeing their valuations plummet and the Euro environment only getting worse, when a well-funded organisation comes along and asks to buy your business, you’d have to be mad not to consider it, take the money and run back to Australia.
So if the logic is there for NAB is it there for NBNK? Certainly on paper there is sense to it. Acquiring the NAB businesses would give NBNK the advantage of no longer being seen as a new entrant which should reduce both the cost of capital and the amount that has to be retained. The acquisition of NAB should also reduce the funding gap (estimated to be £30bn) between the loans being sold and the deposits/current account balances. It would also give NBNK a set of infrastructure and platforms to migrate the Lloyds Banking branches and brands onto as well as giving it an additional 340 branches. It would also give NBNK an established FSA- approved team (though that could also be bought from Lloyds Banking Group).
Where the concern should be for investors in NBNK is the execution risk. The separation of the disposal from Lloyds Banking Group is undoubtedly one of the most, if not the most, complicated de-mergers to execute on in Europe. Separating it and leaving it still running on a copy of the Lloyds systems and infrastructure is difficult enough, merging it into the NAB infrastructure adds even greater complexity. That assumes that the NAB infrastructure is worth merging into given that NAB Europe has been starved of investment for many, many years. The increase in deal risk by bringing NAB into the mix for NBNK can’t be underestimated, however it can be done, it is just a question of whether it should be. The emerging story of the largest de-merger in UK banking continues.
Update 04/10. Despite having suspended the NBNK shares while conversations were underway, the deal has fallen apart. The NAB Finance Director made it clear that with bank shares prices at the bottom and with uncertainty around regulation it would be a disservice to shareholders to sell the UK operation at this time. He reiterated the NAB strategy for the UK being that of organic growth. The cynics could have interpreted this as trying to negotiate the deal price up, however that doesn’t appear to be the case, which leaves NBNK asking the question is NBNK on its own going to be sufficient to meet the requirements of the ICB that Lloyds Banking Group sell to a ‘significant contender’? See http://www.itsafinancialworld.net/2011/09/is-nbnk-alone-going-to-be-enough-for.html