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Skip Navigation LinksHome :: Back Issues :: NAB faces international identity crisis

November 2001

NAB faces international identity crisis





       
Frank Cicutto
Australia's largest domestic bank is struggling to establish a place for itself on the world stage. National Australia Bank (NAB) is presently the largest foreign acquirer in the UK domestic market. However its plans for UK expansion have suffered a setback after losses with its US mortgage-servicing subsidiary, HomeSide.
NAB is an experienced acquirer in the UK, with a positive track record. Mike Macrow, bank analyst at Salomon Smith Barney in Melbourne, says: "Their track record has been reasonable in that most of the things they've bought are worth a lot more now than their acquisition prices."
In 1987, NAB acquired Clydesdale Bank in Scotland and Northern Bank in Northern Ireland. These were followed by the acquisition of Yorkshire Bank three years later.
Analysts say the performance of these regional banks has been quite good, but NAB still lacks a presence in the larger southern England market.
NAB's strategy is to create an international amalgamation of regional banks, say analysts. The acquisitions of Bank of New Zealand in 1992 and Michigan National Corp in 1995 are further pointers to this strategy.
The disposal of Michigan National Corp in the US last November, for $2.7 billion, increased NAB's financial capacity and raised speculation about its plans for expansion in the UK. However, two HomeSide write-downs in as many months, bringing year-to-date write-downs to $2.2 billion, suggest NAB will encounter difficulties with its aspirations.
NAB has openly expressed its interest in the UK market and rumours have abounded for two years. James Ellis, bank analyst at UBS Warburg in Sydney, says: "They've been looking at it for two years and that has basically exhausted it."
The first HomeSide write-down of $450 million, announced in July, resulted from a failure of the hedge designed to protect the asset. In September, a further provision of $1.16 billion was taken when an error was discovered in HomeSide's valuation model. The decision was then made to sell the business, resulting in a $590 million goodwill write-off.
HomeSide losses leave NAB with a lack of capital flexibility, and have absorbed much of A$3 billion ($1.5 billion) of surplus capital, leaving the bank with between A$1.5 billion and A$2 billion to offer a UK partner. Salomon's Macrow says: "There are probably three to four parties interested in HomeSide at the moment." NAB has talked to nine potential buyers. Despite the show of interest, those interested in purchasing HomeSide are likely to be US mortgage companies, such as Washington Mutual, Wells Fargo, Bank of America and JPMorgan Chase.
Australian government policy known as the "four pillars" prevents the Australian domestic market from having fewer than four major banks. Consequently, ANZ, WestPac, Commonwealth and NAB are prevented from consolidating. To undertake any sizeable expansion plans, NAB must look outside its domestic market. After the defeat of HomeSide, a business that NAB's managing director and CEO Frank Cicutto says is: "outside our traditional area of expertise", NAB has decided to withdraw as soon as possible from the US and beat a path to the UK.
"Acquiring in the UK is a high priority but won't happen until they've decided about HomeSide over the next few months," says Salomon's Macrow. Cicutto pressed the point in analyst briefings that: "The first priority is to stabilize the business in HomeSide to maximize the value of operations."
One bank analyst says: "They might have to initially settle for something that helps them in their efforts to roll out MLC's wealth management platform in the UK." MLC is a recent wealth management acquisition. A spokesman for NAB says the company is looking to roll out MLC later this year. This is likely to be through organic growth. But acquiring a smaller, already established company in the UK would help this roll-out plan.
NAB hopes to present a more compelling takeover offer to potential sellers in the UK after the sale of HomeSide. UBS Warburg's Ellis says: "It's hard for them to gear up their balance sheet ahead of actually divesting HomeSide. Were a UK acquisition of a bank to occur it would have occurred by now."
The most likely targets for an eventual acquisition would be the relatively small Bradford&Bingley or Alliance&Leicester mortgage banks. However: "This wouldn't resolve the question of being a top player. It would be better for NAB to focus on organic growth until management finds the right deal," says Macrow. He adds, though: "It's quite conceivable they will conduct a deal with a smaller bank and use this as a stepping-stone to further consolidation in the UK."
The larger commercial banks in the UK have recently been focused on consolidation among themselves. Macrow says Bank of Scotland had talks with Abbey National before completing a deal with Halifax in September. Lloyds made a takeover bid for Abbey National that was blocked on competition grounds by UK trade and industry secretary Patricia Hewitt.
Does this make NAB a more likely prospect for the large UK domestic banks? Probably not. "NAB assets in the UK aren't nearly as substantial as either Halifax-Bank of Scotland, or Abbey National," says CSFB analyst Hugh Maxwell-Davis.
The major UK players would be more likely to show an interest in NAB's regionals as acquisition targets, if they were on the market. However, a sale in the UK is unlikely. "It would be going against their annunciated strategy of getting bigger in the UK. But the Irish Republic asset they have is tiny. They could certainly sell that if the right buyer came along," says Salomon's Macrow.
The ideal merger partner for NAB would be Abbey National, says Macrow. "Abbey has the size and capability that would fit synergistically with NAB. But, the probability of NAB and Abbey getting together is actually fairly small. The main problem is that the two companies are of similar size. In fact, you've got to argue that NAB and Bank of Scotland didn't get together because they were of similar size. It's much harder to make these things work when you've got this problem of where the head office is going to be. Who's buying who?" says Macrow.
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