Why not everyone is convinced about NAB’s British expansion: Bartholomeusz

A UK report that National Australia Bank is considering a bid for the UK Government-owned Northern Rock would, if confirmed, test Cameron Clyne’s credibility with a market that would generally prefer NAB to exit the UK market rather than expand.

As a relatively new and as yet unproven chief executive with two modest acquisitions (Aviva’s Australian wealth management business and 80.1 per cent of the Goldman Sachs JBWere wealth management unit) to bed down and another, rather less modest, $4.6 billion bid for AXA Asia Pacific’s Australasian businesses underway, Clyne already has a lot on his plate.

But NAB is confronted with an historic opportunity in the UK, where the market for banking assets is very much a buyer’s market.

With strong local management in the UK and a chairman, Michael Chaney, who as chief executive of Wesfarmers is very comfortable with the concept of a decentralised model that enables expansion on multiple fronts, it isn’t out of the question that NAB could simultaneously pursue AXA APH and a UK acquisition.

When Clyne was quizzed about the future of NAB’s UK banking assets at last month’s annual meeting his answer was very narrowly interpreted.

He told shareholders NAB had been approached by a number of players to see how the bank could work with them to participate in the consolidation of that market. He went on to say that the approaches indicated that in its Clydesdale and Yorkshire businesses, NAB had a high quality asset that was an attractive platform for participation in UK market developments.

While that was taken to mean that NAB had been approached to sell its UK banks, that’s not what he actually said.

As discussed at the time, his comments could just as easily – and probably more credibly – have been interpreted as a signal that NAB was looking at acquisitions rather than disposals.

The financial crisis led to massive UK government intervention in the sector and more recently to directives from the European Commission and the UK government that those banks that were bailed out – most of the major UK banks – should be forced to downsize by offloading assets. RBS and Lloyds alone will have to sell nearly 1000 bank branches and some non-bank activities.

The opportunity to pick up high quality retail banking brands and assets cheaply and expand NAB’s presence beyond its strong position in Scotland and the north of England – an aspiration the bank has had for decades – may be unique.

An acquisition at this time wouldn’t prejudice NAB’s eventual options – it could continue to expand in the UK or else it would have a better and more valuable franchise to sell at a more propitious time.

Northern Rock would represent an interesting opportunity. It was the first big UK banking casualty of the crisis, primarily because of the short-term nature of its pre-crisis funding.

Initially the UK government tried to support it with massive amounts of liquidity – it pumped in about $A45 billion of liquidity to try to stave off a run – but eventually, in February 2008, it nationalised the former building society, which at the time was the fifth-largest mortgage lender in the UK.

Subsequently Northern Rock has been recapitalised by the UK taxpayer and, from 1 January, split into two separate companies.

Northern Rock plc is a savings and mortgage bank with deposits of about $34 billion, a mortgage portfolio of about $18 billion and capital of about $2.5 billion. Northern Rock (Asset Management) plc will hold and service the bulk of the existing residential mortgage book of about $90 billion, including mortgages within its securitisation vehicles, but will be in run-off mode. It has a capital base of about $3 billion.

It is the on-going bank, Northern Rock plc, that is attracting interest. Virgin Money tried to buy Northern Rock before it was nationalised but its offer was deemed unsatisfactory.

NAB, Spain’s BBVA Group, the powerful supermarket chain Tesco (which is expanding into financial services) and private equity are the others touted as potential buyers by The Observer newspaper, which reported that NAB had conducted a “beauty parade” of investment banks to choose advisers for a bid.

The new Northern Rock doesn’t have a lot of bricks and mortar. It has only about 70 branches but also has postal, telephone and internet businesses and generates most of its new residential mortgage business from third party originators, which ought to make it a capital-lite operation. It has a national presence and is focused primarily on home lending.

Given that it was the “good bank” carved out of the old Northern Rock, it ought to be very clean. Its deposits are guaranteed by the UK government and some of its wholesale funding carries guarantees until at least the end of this year.

Whether it is Northern Rock, or the retail branch networks being forcibly divested by the UK majors, Clyne would know that it makes more sense to selectively bulk up NAB’s UK platform at this point than to offload it into a market where there will be a lot of banking assets available. Its own businesses are stable and profitable, despite the difficult conditions in the UK.

If he chooses expansion over an exit, it won’t be an easy sell to a sharemarket that has been long disenchanted with NAB’s UK presence.

The appealing logic of acquiring straw hats in winter, however, may be compelling to NAB, given that rivals Commonwealth and Westpac have exploited the crisis to expand aggressively through domestic acquisitions and have created a sizeable gap in terms of scale between themselves and NAB and ANZ.

This article first appeared on Business Spectator.