National Australia Bank is undertaking an IPO of its UK retail arm, Clydesdale Bank. By selling down 25% to institutional investors and in specie distribute the remaining 75% to existing shareholder. NAB management is essentially washing of its hands of its UK problem.
We gather that now is not the right time to undertake a sale of a UK bank given the structural and competitive issues in the UK but they still want to move forward with discarding the UK business so an in specie structure is best move going forward.
NAB Financial Summary Post CYBG Demerger
Table above shows important proforma metrics provided by NAB post the demerger of CYBG.
- Cash earning will improve more than 10% on a group basis but slight decline excluding specific items. This implies current earnings are dragged down by CYBG which is run at a loss due one time charges. Excluding these charges underlying profit will not be broadly impacted by this transaction.
- Net Interest Margin (NIM) experience a slight decline from 1.87% to 1.82%. Interesting the CYBG disclosure the NIM for the UK retail business is above 2%. As we implied in our analysis of CYBG. The obstacle for CYBG is not the headline revenue or growth. It is its high cost structure. This is reflected in the banking cost to income ratio (CTI) where it is above 70%.
- CTI for NAB decline full 9.7% across the group from 50% to just above 41%. The impact is largely positive for NAB which will now be predominantly Australian Bank (with focus on mortgages and business banking) with a UK retail arm.
- By removing the retail arm which is responsible a large disproportion of the cost structure, the group will be better for it.
- Slight decline in funding index given UK relies larger on retail deposit. Not really issue post transaction.
Key takeaway from CYBG presentation is that NAB will be better off without the business even if management gives it away at what can be considered firesale prices of 0.5x to .0.75x book value.
However given the terrible returns in the discarded unit with Return on Equity from 5.1% in 2015 to 7.5% in 2014 means overall impact is not that bad.
If new Clydesdale management get the cost structure under control then it could be a good buy.
We are skeptical given that in the initial 12 to 24 month of independence it still relies on NAB for some critical support functions. Once those are brought in house, cost will be borne buy CYBG shareholders.
The challenge faced by the management is that it has to cut cost out of the business at the same stack on additional ancillary infrastructure cost that is critical for day to day operations.
The return of Australian banks shows that NAB has outperformed its peers as result of the transaction. This can be attributed to investors giving credit to management that the current business structure is much clearer and transparent.
NAB Dividend History
Chart above shows the NAB dividend over the last 10 years. It took a tumble during the GFC where it was cut by more than 20% and has made its way back since.
The dividend has been broadly flat in the recent period at a level just slightly above the peak pre crises earnings. After the CYB demgerger, most of the groups income will be sourced from Australia. This means that the franking credit component of the dividend could increase in the future to 100% of the dividend.
The business has been hampered by its history of overseas adventures. The goal of Clydesdale demerger is to give it self a new start and by focusing on the Australian market once again.
Australian banking sector is dominated by the big which make up a large portion the listed companies on the ASX (see ASX 20 and broader ASX Ordinary Indices). Hopefully the shareholders will be rewarded for owning a financial institutional with an oligopoly position.