National Australia Bank Ltd. has the potential to release as much as A$4 billion ($4.2 billion) in capital by selling its U.K. unit and commercial real estate, and its Australian custody business, according to Citigroup Inc.
Improved equity markets give room for the country’s fourth-largest lender by market value to sell the assets, Citigroup analysts led by Craig Williams said in a note to investors dated yesterday. They upgraded the stock to buy from neutral on diminishing credit risk, possible asset sales and cost cuts, and raised NAB’s share price target to A$29.75 from A$25. NAB shares rose 2 percent to A$27.90 at 12:45 p.m. in Sydney trading, the highest since April 2010.
“An exit of NAB’s remaining U.K. retail banking business at closer to book value has become more viable recently,” the analysts wrote in the report. “We see fewer near-term risks of disappointment for NAB (credit risk) and the potential for positive responses to announcements on either asset sales, expense initiatives or management change.”
NAB Chief Executive Officer Cameron Clyne on Nov. 4 urged a “patient approach” toward the lender’s poor performing U.K. assets, saying a turnaround depends on a revival of the British economy. Speculation on sale of the bank’s U.K. unit has been ongoing, with the Times of London last month reporting that Banco Santander SA was considering buying it. Santander denied any such talks.
A double-dip recession in the U.K., where NAB has owned Scotland’s Clydesdale Bank and the Yorkshire Bank since 1987, forced the bank on Oct. 31 to increase charges for bad and doubtful debts from the U.K. unit by 335 million pounds ($531 million) in the year to September 2012.
A sale of the U.K., unit at 0.9 times book value may boost core tier 1 capital by 70 basis points and allow for a capital return of about A$1 billion, the Citigroup analysts said.
Meaghan Telford, a Melbourne-based spokeswoman for the NAB, declined to comment immediately on the research note.
Sale of the custody business, which is a securities safekeeping service, could generate more than A$500 million in pretax profit, the analysts estimated. NAB may consider selling the custody business as it didn’t have a global profile in the segment, they said.
NAB’s rivals Westpac Banking Corp. sold its custody business to HSBC Holdings Plc in 2006 and Australia and New Zealand Banking Group sold its unit to JPMorgan Chase & Co in 2009, filings from the banks show.