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NAB profit hits $3.3b, Clydesdale Bank demerger and $5.5b rights issue announced

 "In relation to exiting our UK Banking business, we have been examining a broad range of options including those provided by public markets," chief executive Andrew Thorburn said. Photo: Arsineh Houspian "In relation to exiting our UK Banking business, we have been examining a broad range of options including those provided by public markets," chief executive Andrew Thorburn said. Photo: Arsineh Houspian
National Australia Bank said it would raise around $5.5 billion in a rights issue and planned to demerge its UK bank as it reported half-yearly cash earnings of $3.32 billion.

The bank also announced former Treasury secretary Ken Henry will succeed Michael Chaney as chairman when he retires in December. Mr Henry joined the NAB board in 2011.

NAB's cash earnings were up 5.4 per cent on consensus estimates, and an interim dividend of 99¢ per share fully franked.

Former Treasury secretary Ken Henry has been appointed the chairman of the bank, to succeed Michael Chaney when he retires in December this year Photo: Louise Kennerley

NAB said it planned to pursue a demerger of its troubled UK business the Clydesdale Bank, a business that has been a persistent drag on returns.

The rights issue was first reported by The Australian Financial Review's Street Talk column on Wednesday afternoon.

The bank will look to demerge 70 to 80 per cent of Clydesdale to NAB shareholders and the remaining 20 to 30 per cent will be sold through an initial public offering to institutional investors.

In an investor presentation accompanying the results, NAB said the transaction was dependent on the outcome of discussions with regulators, which remain ongoing.

It said United Kingdom banking regulators had said that in order to demerge the business, NAB would have to provide up to capital support to of up to £1.7 billion ($3.2 billion) to shield the bank against costs from mis-sold financial products.

"In relation to exiting our UK Banking business, we have been examining a broad range of options including those provided by public markets," chief executive Andrew Thorburn said.

"It is a priority to exit this business, and we are today announcing our intention to pursue a demerger and IPO of the UK Banking business."

"A strong balance sheet has always been a priority at NAB which is why we are today announcing that we will be raising $5.5 billion of capital through a rights issue, as described below. The capital raising facilitates our proposed exit from the UK Banking business and positions us ahead of anticipated regulatory changes."

NAB also said it had struck a reinsurance deal with "a major global reinsurer" that would release around $500 million of CET1 into the group and reduce NAB's exposure to retail life insurance.

On the capital raising, NAB said it would issue 194 million new shares - which is about 8 per cent of issued capital - at an offer price of $28.50. This is a 19 per cent discount to NAB's closing price on Wednesday of $35.20.

NAB said it could have achieved the demerger of its UK business with a smaller capital raising, such as by partially underwriting its dividend reinvestment plan, but this would have taken its capital levels to the lower end of its preferred range.

The  £1.7 billion in capital support NAB must provide to the UK assets it offloads will be deducted from NAB's group capital holdings, however NAB said that the number was "substantially" higher than its own stress testing scenario suggested.

"While this figure is substantially in excess of NAB's own stress test scenario, we believe that the disadvantage of the expected capital deduction is outweighed by the benefits of separating the business," it said.

NAB said that if actual losses from the charges in the UK were lower than £1.7 billion, it would receive the benefit through its own group capital ratio.

It also said that although there had been "significant process" in its talks with regulators, there was "no certainty" the transaction would occur.

After the raising it expects earnings per share to be 4.5 per cent lower and return on equity to be 1.4 per cent lower for the March half.

It said it wanted to maintain a 99c fully-franked dividend for the second half of this year.

Investors are also digesting the bank's interim results. NAB said cash earnings in the Australian bank were $2.57 billion, up 4.0 per cent driven by revenue increases of 3.9 per cent on higher housing and business lending. But these were partly offset by weaker margins. In the business bank, NAB's lending margin contracted over the half by 6 basis points to 2.11 per cent.

NAB Wealth's cash earnings increased 28.2 per cent to $223 million reflecting improved results from both the investments and insurance businesses and lower operating expenses, the bank said.

In New Zealand, cash earnings in local currency were up 4.5 per cent to $NZ 418 million on lending growth and margins improved.

Capital is in the spotlight in the wake of the financial system inquiry, which pointed to the importance that Australian banks look "unquestionably strong" to foreign investors who fund the gap between domestic deposits and lending. NAB has been under growing pressure to sell its UK banks.

NAB said its CET1 ratio was 8.87 per cent at March 31, up 24 basis points overt  the half and the target ratio from January 2016 remains between 8.75 per cent and 9.25 per cent.

NAB's capital raising follows Westpac Banking Corp's $2 billion equity raise via a partially underwritten dividend reinvestment plan,  announced as the bank delivered flat profits on Monday. ANZ Banking Corp, meanwhile, said on Tuesday it would continue its dividend reinvestment plan, which should raise around $450 million during the period, but it will not be underwritten so the amount raised depends on the level of shareholder participation. Analysts said ANZ might come under some pressure on capital given NAB and Westpac are moving more aggressively.

NAB shares will remain in a trading halt until the institutional component of the capital raising is conducted.

Author: James Eyers
Source: The Sydney Morning Herald 

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