Today, the National Australia Bank Ltd. (ASX: NAB) share price drifted 1.4% lower upon the release of further details of its proposed demerger of its UK bank subsidiary, Clydesdale Banking Group.
Clydesdale has long weighed on NAB's returns, accounting for billions in bad debts and provisions since NAB bought the bank in 1987.
Many senior management teams have come and gone with an ambition to rid NAB's core Australian and Kiwi businesses of their foreign exposure. When analysts and investors speak of 'legacy issues' or the 'tail' in banking and insurance, NAB's foreign banks remind us why these things cannot be underestimated.
Nevertheless, in today's update, NAB said it is seeking the go-ahead with the proposed demerger. As part of a deal that NAB says will reduce "the risk and complexity of NAB and supports improvements in profitability and capital generation" the bank will offer one Clydesdale share for every four NAB shares currently owned by shareholders.
As previously foreshadowed, NAB will list Clydesdale on the ASX, through the use of CHESS Depository Interests (CDIs); and create a FTSE (London) listing for the CDIs and ordinary shares. Current NAB shareholders will own 75% of the company, with the remaining ownership held by new institutions.
While NAB says the demerger offers it an immediate exit from the UK, NAB shareholders will still be exposed to the market. NAB's board and Independent Expert, Grant Samuel, say the demerger is in shareholders' best interests.
According to NAB's preliminary discussions with the ATO, if you're a NAB shareholder and want to sell your Clydesdale shares you may not be eligible to receive a capital gains discount if you sell within 12 months of its listing. Shareholders with 2,000 NAB shares or less are being offered a share sale facility.
In addition to the billions of dollars NAB has set aside to fund Clydesdale's legacy issues, NAB will be responsible for 'transitional services' such as risk, treasury, HR and finance for Clydesdale for three years post the demerger. Further, depending on the price NAB can get for the bank, NAB will likely take a huge accounting loss. It estimates the loss could range from $1.7 billion to $4.66 billion.
Based on its accounts from 30 September 2015, NAB's all-important capital buffer against market shocks (known as the CET1 ratio) is expected to fall from 10.24% to between 9.73% and 9.94%.
However, over time, NAB forecasts a number of operating benefits will result from the Clydesdale transaction, including the ability to significantly lower its cost base and improve its return on equity.
There are a number of hurdles for NAB to jump to get the demerger across the line. NAB plans to hold a vote on 27 January 2016. Then — if approved by shareholders — the bank will seek a second court approval and the offer price will be set in early February 2016. Finally, it will be floated later that month.
Under the control of CEO, Andrew Thorburn, NAB is making the tough decisions. It has offloaded its US bank, Great Western Bancorp, and divested part of its insurance assets to Japan's Nippon Life. However, the next few months will be the most important in striving towards the bank's goal of removing non-core assets from the balance sheet and improving the bank's returns over the long term.
Personally, I would not consider owning NAB shares until the demerger is complete and their valuation becomes more compelling.