Volatile equity markets and lurking predator for National Australia Bank Ltd.'s (ASX: NAB) British bank have not deterred NAB from floating Clydesdale Bank.
If anything, NAB is stepping up its marketing effort to sell the merits of the initial public offer (IPO) of Clydesdale with NAB's shareholders likely to end up owning 80% of Clydesdale following the spin-off.
Investors are nervous as the global market sell-off triggered by fears of a hard landing for the Chinese economy makes this a challenging time to list a new company.
I am less concerned about the market volatility as history has shown good companies can attract interest in just about any kind of market.
The key is whether that is good upside potential for the stock over the next two to three years.
In some ways, Clydesdale and the float of private health insurer Medibank Private Ltd (ASX: MPL) have some things in common. You don't buy into the float because you think there is good topline growth potential, but because of cost outs where management can trim expenses to bolster profit and margin.
From that perspective, Clydesdale has a number of growth levers it can pull given its high cost-to-income ratio of 71%.
High expenses are one big reason why the UK bank earns a pretty pathetic return on tangible equity of 8.1%, which is among the lowest in the country.
Clydesdale is promising to lift its return on equity to "double-digit territory" within a "reasonable amount of time", which I take to mean one to two years.
There's another potential tailwind for profit growth. UK regulators are trying to encourage competition in the banking industry and any reforms to achieve that goal will likely benefit Clydesdale as it is the country's largest second-tier bank.
This is one reason why some analysts believe there will be a wave of consolidation among banks outside the biggest six lenders in the UK.
Spanish bank Banco Sabadell is reported to be circling Clydesdale as it looks to expand in the UK market, although the acquisition-hungry bank is also said to be running the ruler on other acquisitions as well.
NAB said it will consider an "exceptional" offer for Clydesdale, which is disappointing to hear because it suggests the bank isn't open to considering other options for Clydesdale. That isn't what shareholders like to hear.
NAB will provide more details on the float when it reports its full-year results in a month's time. Clydesdale will be listed in the UK but will have a secondary listing on the ASX. You can read more about the Clydesdale divestment here.
