National Australia Bank to raise $4.4 bn to exit UK business

National Australia Bank (NAB), one of the country's big four lenders, has finally decided to exit its struggling UK business, at the same time as it progresses with the stake sale of its US venture Great Western Bancorp.

NAB's UK operations include Clydesdale Bank and Yorkshire Bank, the former one being the Australian lender's largest non-core asset with 12 per cent of the group's capital.

Under the plan unveiled yesterday, NAB will spin off 70-80 per cent of its British business to its shareholders and sell the remaining 20-30 per cent in an initial public offering (IPO).

However, under the UK regulations, the NAB has to provide £1.7 billion ($2.7 billion, A$3.4 billion) in capital support before the subsidiaries are divested. NAB also plans to raise another $1.7 billion (A$2.1 billion) to boost its capital reserve.

To meet the fund requirement, NAB is embarking on the biggest ever rights issue in the Australian market, for A$5.5-billion, which is well above Rio Tinto's A$4.4 billion in 2009 and Wesfarmers A$3.7 billion, also in the same year.

The group's intention to exit the UK business was signaled last August as part of its strategy to focus on its core businesses in Australia and New Zealand.

The bank said that out of several exit options, the demerger plan was chosen as it would accelerate the full exit of the UK business, as opposed to a prolonged multi-staged public market sell-down, and allows an exit to be targeted by the end of 2015.

According to NAB chief executive Thorburn, the deal made financial and strategic sense.

In an interview with Business Day, he said, ''We did look at other options of deferring it and may be holding it for an extended period until the economy had improved the political risks had gone, and may be the conduct risks had receded.''

''But we looked at the economies of this, despite having the £1.7-billion deduction, the economics still favoured moving forward.''

The two shares for 25 rights issue was priced at A$25.50 a share representing about 19-per cent discount to its previous closing price, which was welcomed by investors.

The fund raising has been announced by the Thorburn as the bank reported a A$3.3-billion first- half year profit, up 5.4 per cent compared to a year ago and declaring a dividend of 99 cents a share.

According to some analysts, NAB's plan to lift its top-tier capital is a prudent approach as some of the country's biggest banks are resorting to biggest fund raising since global financial crisis to shield against potential mortgage losses, and to meet more stringent global standards.

Westpac is raising A$2 billion, while ANZ Banking Group may garner close to A$480 million.

Last week, Victoria-based NAB said that it is selling a further 34.6 to 40 per cent stake in the US subsidiary Great Western Bancorp (GWB) for about $430-$495 million, reducing its ownership in the South Dakota- based lender to around 34 to 28.5 per cent. (See: National Australia Bank sells 34.6% stake in US subsidiary for $430 million).

Bank of America Merrill Lynch, Morgan Stanley and Macquarie Capital are acting as joint lead managers to the NAB's deal.