Will Clydesdale cost National Australia Bank Ltd. shareholders billions?

National Australia Bank Ltd. (ASX:NAB) could incur a loss of between $1.7b and $4.66 billion when it sells Clydesdale Banking Group.

| More on:
a woman

You鈥檙e reading a free article with opinions that may differ from The Motley Fool鈥檚 Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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聽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聽"the risk and complexity of NAB and supports improvements in profitability and capital generation"聽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聽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.

Foolish takeaway

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.

Motley Fool contributor Owen Raszkiewicz has no position in any stocks mentioned. Owen welcomes your feedback on Google plus (see below),聽LinkedIn聽or you can follow him on Twitter聽@ASXinvest. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on 鈴革笍 Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
鈴革笍 Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
鈴革笍 Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more

asx investor daydreaming about US shares
鈴革笍 How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more

鈴革笍 Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more