The National Australia Bank Ltd. (ASX: NAB) today announced an indicative pricing range for shares in the IPO of its soon-to-be-demerged UK bank Clydesdale and Yorkshire Bank (CYBG).
Shares are expected to be priced for institutional investors between 175 pence and 235 pence, which would value the bank in the region of £1.54 billion to £2.07 billon. That would imply a multiple of book value of FY15 net tangible assets of 0.56 to 0.76 times.
Earlier in the year NAB raised $5.5 billion in new equity, with $2.8 billion of that being contributed by retail shareholders as it looked to strengthen its balance sheet to prepare for, inter alia, the UK float and regulatory capital adequacy requirements.
Notably, the bankers have elected to dump 75% of their ownership interest in the troubled UK bank on their own retail shareholders, with eligible shareholders receiving one CYBG share or ASX-quoted chess depositary instrument for every four NAB shares held.
The moderate outlook and poor past performance of the UK bank may see many investors head for the exits once the stock is listed and the current turmoil engulfing global capital markets will not help investor confidence in CYBG either.
Indeed, management's decision to palm 75% of CYBG off to NAB's own retail shareholders is indicative perhaps of a lack of institutional or professional investor enthusiasm for a regional UK bank with little in the way of standout qualities.
The bank's colourful recent history includes problems around mis-selling insurance products, financial conduct, disastrous property loans, and regulatory fines, CYBG has a rap sheet to make Ned Kelly proud.
In fact the UK Financial Conduct Authority is reportedly requiring the NAB to set aside more than $3 billion to cover potentially more claims against CYBG in the future.
The CYBG also faces the same capital adequacy regulatory headwinds as other global banks, while the UK property market's outlook is moderate and the economy itself still vulnerable to another significant downturn. As in Australia, investor lending practices to property investors are also coming under the scrutiny of regulators and face headwinds.
CYBG's poor past performance means it firmly falls under the 'turnaround' category and Warren Buffett did not reportedly say 'turnarounds seldom turn' for nothing.
Despite the moderate pricing of the CYBG, I expect the share price will come under pressure when it lists with NAB's long-suffering retail shareholders feeling the pain again if CYBG continues to struggle into the future.
The good news though is that divesting the UK business may prove a big positive for NAB shares, which are down 20% over the past year.