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Unusual 200% profit opportunity will keep NAB lagging behind peers

The National Australia Bank Ltd. (ASX: NAB) share price is falling behind the other big three banks and it will likely keep lagging for some weeks yet.

If you are wondering why, it’s to do with an arbitrage opportunity that is created by its share purchase plan (SPP), in my opinion.

The SPP is part of the bank’s $3.5 billion capital raising to shore up its balance sheet during the COVID-19 pandemic.

The biggest loser

The NAB share price tumbled 1.3% to $16.02 as we head into the market close when the S&P/ASX 200 Index (Index:^AXJO) rallied 0.5%.

In contrast, the Commonwealth Bank of Australia (ASX: CBA) share price gained 0.5% to $59.55, while the Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) share prices dipped around 0.5% each.

I am expecting the NAB share price to keep falling behind as retail shareholders who are entitled to participate in the SPP can dump their holdings now to make a quick buck.

How to make 200% on NAB shares

The offer price under the SPP is $14.15 a share, or 2% under the volume weighted average price (VWAP), whichever is lower.

This means there is at least a 13.2% profit to be had by selling the stock now and buying it back through the SPP, which closes on May 22.

But the profit margin is even bigger that the difference in the prices suggests. Existing shareholders will get paid the fully franked 30 cent a share interim dividend. This puts the returns at just over 16%!

Not a bad profit given that the returns will be generated in less than a month as shares under the SPP will be issued on 2 June. If you cared to annualise that, the opportunity represents a near 200% gain!

Almost risk free profit

What makes the trade even more tempting is that it’s risk free profit with the only thing shareholders need to worry about is getting scaled back on the SPP if demand exceeds supply.

Eligible shareholders can apply for up to $30,000 worth or new shares, but the bank can opt to issue fewer shares than what any shareholder applied for.

This means you might not be able to replace every share you sell on market now, but I think it’s a risk many are willing to take.

More sellers than buyers

The issue is that the trade will likely represent a significant headwind for the stock. This is because the percentage of retail investors on NAB’s register stands at 45.9% at the end of March, or 23.8 billion shares.

This is the highest proportion of retail shareholders on the bank’s share register in a year!

While the number of sellers is on the increase, there is likely to be a distinct lack of buyers on the opposite side. Institutional investors who are keen to buy the stock would have more than likely gotten their fill in the share placement.

It could be a while before we see fund managers bidding for the stock on the open market in any meaningful way.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

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 Scott Phillips.