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There’s finally a reason to buy National Australia Bank Ltd.

NAB bank share price
Credit: NAB

There hasn’t been much of a reason for investors to buy shares in National Australia Bank Ltd. (ASX: NAB) but all that may be about to change.

There is speculation that NAB may be considering spinning-off its funds management business into a separate listed entity, according to the Australian Financial Review.

The market isn’t too excited about the news with shares in the bank falling 0.5% to 14-month low of $29.02 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is hovering just under breakeven.

But the weakness could be a buying opportunity as stocks that make such divestments typically outperform.

To be more exact, it is the unwanted child that is being spun-off that tends to outperform, although the parent also tends to do okay post-divestment – and okay is pretty good in my book for Big Bank stocks as I see far more headwinds than tailwinds for the sector.

You only need to look at past spin-offs to understand what I mean. NAB undertook such a move nearly two years ago when it floated its UK banking arm CYBG PLC/IDR UNRESTR (ASX: CYB), better known as Clydesdale Bank.

Since then, Clydesdale has surged nearly 45% while NAB has gained close to 20%. That is well ahead of industry leader Commonwealth Bank of Australia’s (ASX: CBA) 12% gain and Westpac Banking Corp’s (ASX: WBC) 6% advance.

Other recent spin-offs have followed a similar pattern. Just think about South32 Ltd (ASX: S32) and its 70% plus rally after it split with BHP Billiton Limited (ASX: BHP) in 2016, and if you have a slightly longer memory, consider paint company DuluxGroup Limited (ASX: DLX) after it was orphaned by chemicals group Orica Ltd (ASX: ORI).

There is another reason to feel upbeat about any divestment from NAB. The transaction will raise enough money for the bank to consider further capital returns to shareholders, including share buybacks.

As I have written recently, only Australia and New Zealand Banking Group (ASX: ANZ) has the financial muscle to extend their capital return program in 2018 among the Big Four banks. Such a divestment from NAB will also put it in the same category as ANZ.

The rumoured spinoff of NAB’s funds, superannuation and investment advisory business could become a $6 billion listed entity if you look at the trading multiples of similar type businesses, such as IOOF Holding Limited (ASX: IFL).

It also follows a recent trend among the Big Banks to shed non-core assets as the banking sector faces a slowdown in credit growth, the risk of falling house prices and the threat from emerging “disruptors” that are slowly but surely eating into their businesses.

CBA is also thought to be considering a float of its funds management business, Colonial First State.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, National Australia Bank Limited, South32 Ltd, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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.

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