All eyes are now on National Australia Bank Ltd.'s (ASX: NAB) divestment of Clydesdale Bank after it sold its entire stake in Great Western Bank for $1.46 billion.
While the sale of US-based Great Western will force NAB to recognise a $396 million loss, investors are in a pretty forgiving mood and have bid the stock up 1.8% to $34.48 in early trade as experts speculate that the bank's long-term underperformance is about to come to an end.
The loss from the Great Western transaction has been anticipated by the market and the proceeds from the sale will lift the bank's Common Equity Tier-1 ratio by 34 basis points (or 0.34 of a percentage point) to around 10%.
NAB is also readying itself to shed another bothersome asset that has been a big drag on its profitability. I am referring to its UK-based Clydesdale Bank and the Australian Financial Review reports that NAB has two windows of opportunity to undertake the divestment if it wants to meet its self-imposed calendar year-end deadline.
The first is after the earnings onslaught of the August reporting season and the second will be just after it releases its full year result that is expected on October 28.
The big question on the minds of shareholders is what to do with your shares in Clydesdale. The bank will be spun-off as a separately listed entity on the London Stock Exchange, although Clydesdale will have a secondary listing on the ASX as NAB shareholders will be stuck with 70%-80% of the demerged entity.
The UK bank has been so destructive to NAB's shareholder value over the years that I won't be surprised to see many wanting to wash their hands of the investment.
But I believe that would be a mistake. Sure, history has shown that shares in spin-offs typically outperform their parents over a 12 to 24-month period, but I am not primarily focused on this.
I think Clydesdale holds strategic value to local investors in an age where international equity exposure is gaining prominence.
While we have a good handful of ASX-listed stocks with material offshore earnings, we have very few choices of companies that have next to no exposure to the Australian economy. For this reason alone, I think there will be considerable interest in Clydesdale Bank – assuming the price is right.
It's also worth noting that since wealth manager AMP Limited (ASX: AMP) divested its UK fund manager Henderson Group plc (ASX: HGG) in early 2004, the spin-off has surged by over 500% compared with AMP's 29.1% gain. Henderson is also listed in London.
While local investors are casting an eye over to the UK, CLSA believes that offshore fund managers are looking closely at NAB.
These foreign investors have shunned NAB compared with the other big three banks as its operational problems have made NAB "un-investable", according to the investment bank.
If you looked at earnings per share growth over the past 14 years, NAB only generated 2% growth while its peers have produced a 174% increase to earnings.
But international investors have started buying NAB shares in the last two quarters and their attitude towards the bank may be changing for the first time since 2000.
As I mentioned in my article yesterday, I think NAB represents good value and is a "buy" in my book.
