UBS Securities analyst Jonathan Mott said the banks are too small, have “no strategic value”, drag down NAB’s earnings and face a wave of economic and regulatory pressure.
His call reflects increasing pressure on NAB from Australian investors. Last week it embarked on a strategic review of its UK arm. Yorkshire, which trades as part of Clydesdale, reported deeper bad debts, driven by writedowns in its commercial property loanbook, worth around £6.2bn.
Bad debts at Yorkshire and Clydesdale were the main reason for a surge in impairment charges across NAB in its first quarter.
NAB chief executive Cameron Clyne warned investors to expect a prolonged downturn in the UK.
In a research note to clients, Mr Mott said it is “time to make the big call... get out of the UK”.
He said NAB should be prepared to accept as little as £1.87bn – half of the banks’ book value of £3.4bn. “This is not a book value asset, in our view,” he said. An upper price of £2.62bn or 0.7 times book value would also be realistic, he added.
Selling at this price range would incur post-tax losses of £786m to £1.31bn for NAB, he said.
“We believe the UK provides NAB with no strategic value, is sub-scale, and is facing ongoing economic and regulatory pressure,” said Mr Mott. “NAB also appears to have missed out on acquiring other banking assets recently auctioned.
“This means a recovery in ROE (return on equity) towards its cost of capital looks unlikely for the foreseeable future. This business continues to drag on investor sentiment and NAB’s multiple.” While Yorkshire and Clydesdale have remained profitable through the downturn, they have required considerable capital injections from their parent. Citigroup calculates NAB has provided the banks with net funding of £2.8bn, pumping in £1.5bn since late 2008.
The charge for impaired loans had increased to 1.27 per cent of its UK book by December, from 0.86 per cent in September.
Mr Mott is sceptical over the latest strategic review, which he said is “nothing new”. The outcome of the review is due in May.
He believes NAB could better employ the capital from a UK sale by “repatriating” it to Australia, buying bonds in other major banks, or reinvesting it in its Australian business. “We believe that exiting the UK would reduce the riskiness of the group,” he said.
Potential buyers for Yorkshire and Clydesdale could include new banking outfit NBNK, investment group Sun Capital, and One Savings – backed by JC Flowers.
However, other analysts believe NAB is unlikely to sell Yorkshire yet.
Nomura analyst Victor German said: “Although domestic (Australian) investors would certainly prefer NAB selling its UK assets, realistically getting an adequate price is going to be challenging. NAB is more likely to reduce its exposure by running off its commercial book.”
Craig Williams at Citigroup also sees a run-off of the commercial book, plus an eventual sale, as the most likely outcome.
NAB’s executive director for finance, Mark Joiner, recently said there is no need for a ‘fire sale’ of the banks.
“We would prefer to own the asset, raise the returns and exit a few years later, or IPO it. There are options.”