Business

NAB chairman Ken Henry confident on Clydesdale float despite market turmoil

Market turmoil around the world should not derail NAB's exit from Britain. And unharnessed from Clydesdale, it will be able to concentrate on business at home.

National Australia Bank's new chairman, Ken Henry, says high volatility in equity markets is not likely to derail the initial public offering of Clydesdale Bank in the first week of February.

A collapsing start to the year on markets could be seen as a final headache for NAB's board and management as they seek to break free from the shackles of banking in Britain, which has destroyed billions of dollars in value for investors over the past decade.

NAB shareholders will vote on the demerger of Clydesdale Bank on January 27. The deal will see 75 per cent of the British small business and retail bank go to NAB shareholders in the form of new shares, while the remaining 25 per cent will be offered to institutional investors via an IPO on the London and Australian stock exchanges. Clydesdale's IPO price will be announced on February 2. 

"It will be a considerable relief to everybody on the board and also to management to have the demerger executed," Dr Henry said, while emphasising that NAB remains intensely focused on execution. 

"It will be very, very important to get this behind us. The UK story has been quite distracting for both management and the Australian board, and there is no great logic that we can see having banks in the UK run out of Melbourne." 

Clydesdale provides 9 per cent of NAB's top-line earnings of $19 billion.

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Volatility will not stop deal

With global equity markets starting the new year in a tailspin as investors fret about the outlook for global growth, Dr Henry said: "I don't foresee this affecting the transaction. By early February, our aim is – and we fully expect it to happen – for this to be executed. We are in a very intense period right now." 

NAB does, however, have options if markets deteriorate.

The demerger of the 75 per cent of Clydesdale is not conditional on a successful IPO of the 25 per cent.

"If volatility in equity markets were to become more pronounced, it is open to us to have a smaller IPO, or defer the IPO or whatever, and to let us continue with the demerger. But I fully anticipate that we will have a very successful IPO of the 25 per cent," Dr Henry said.

"The early indications we have had, based on conversations with more than 300 investor groups, leads us to think this will be a successful IPO." 

Troubled assets sold

NAB last year sold its US subsidiary, Great Western, via IPO in highly volatile markets as chief executive Andrew Thorburn seeks to refocus the bank on domestic operations.

Clydesdale hung like a Sword of Damocles over Dr Henry's predecessor in the NAB chair, Michael Chaney, who relinquished the role he held for a decade after NAB's AGM in Perth in December. At that meeting, Mr Chaney was again forced to defend NAB's underperforming share price since the financial crisis. 

Dr Henry, who as Treasury secretary helped the government of Kevin Rudd navigate the global financial crisis, described Mr Chaney's tenure as "pretty rugged years". 

"Nobody could have predicted the GFC and the impact that was going to have on banking systems around the world, and the sort of business NAB had was relatively more exposed, as it turned out," he said.

Clydesdale was hit hard because its lending was skewed towards volatile commercial real estate, while its retail operations were hit by charges of misconduct. But NAB's problems in the UK predate the GFC; for the best part of a decade up to 2005, its European operations were neglected.

Shareholders face a decision 

As NAB shareholders consider whether to hold or sell their Clydesdale shares, NAB has forced Mr Thorburn and its directors into 12-month lock-in arrangements on their personal Clydesdale shareholdings arising out of the demerger. Dr Henry described Clydesdale as "clean" and "probably the best-protected from conduct issues of all UK banks".

"It has a strong capital position, its balance sheet is very strong, especially with the [commercial real estate] part of the portfolio having been taken out and dealt with separately. It looks like a very strong bank with a lot of upside. That is the message coming back to us when we talk to investors." 

Credit Suisse analyst Jarrod Martin this week described Clydesdale as a "below-average-quality franchise, but with good prospects for medium-term efficiency and ROE upside potential, executed by a reinvigorated board and management team, and also offering takeout potential over time".

NAB's return on equity will rise from 13.2 per cent to 14.4 per cent after the deal, he said, while its price-to-book multiple will also re-rate higher. 

One Sydney-based fund manager who holds NAB said he expected downward pressure on Clydesdale shares after it lists, as many Australian institutions will sell because they do not want exposure to UK banking at any price.

But he said his fund would be comfortable holding them, given the attractive valuation and potential for Clydesdale to be acquired by one of the larger UK banks. 

Focus closer to home

Freed of the UK shackles, Dr Henry said NAB's board would be able to focus more time on driving Australia and New Zealand.

"Business banking has become much more competitive, but we don't want to see NAB lose its position as Australia's premier business bank," he said.

"But we are not going to achieve the stabilisation at any ROE – the perspective is to ensure shareholders receive an enhanced return over time."

He pointed to agriculture and the information and communications sectors as providing particular opportunities. 

While the structure of NAB's balance sheet – underweight mortgages, overweight business lending – had not been suited to the structure of growth in the Australian economy, "that is largely cyclical," he said.

"The question is when does strong business credit growth resume? No one knows the answer to that question, but we want to be as well prepared as we possibly can be for when that happens. The future prospects for a bank with the shape of our balance sheet is likely to be better than the experience of the last few years." 

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