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NAB Stock Price Could Benefit From A Re-Rating
Australian banking major, National Australia Bank (NAB) could have its stock price re-rated which would result in it trading at as much as a 22 per cent premium to its current average price, if it admits to running a “bad bank” and discloses the performance of such a business division separately.
In the wake of $2 billion institutional placement which was fully subscribed at $21.50 a share, investment bank UBS issued a report targeting the “chronic” under-performance of the lender over the last decade.
UBS banking analyst Jonathan Mott said that NAB suffered from poor leadership, made bad investment decisions that produced anaemic financial returns. All of which has caused its under-performance and flat share price since the start of the decade.
NAB’s shareholder return since the start of the decade was 61 per cent, compared with the 129 per cent average of the Big Four banking groups. Most of its return had come from dividends.
The businesses which have caused the under-performance according to Mr. Mott, include its UK subsidiary Clydesdale Bank, as well as noncore investments in collateralized debt obligations through its institutional business nabCapital.
Clydesdale bank which operates in Britain, whose economy has sharply contracted, has seen its return on equity collapse to as low as 2.7 per cent for the first half of this financial year. nabCapital delivered just a 3.2 per cent return on equity during the 2008 financial year.
Despite the under-performing businesses, NAB as a group delivered a 17.8 per cent return on equity during the 2008 financial year.
“We have re-named these businesses Bad Bank. Given Bad Bank’s weak outlook and lack of strategic fit, we believe that NAB should acknowledge the existence of its Bad Bank, and move to separately disclose the performance of these businesses to enable them to be valued independently from the rest of the group. (NAB should then) provide a timetable to exit these businesses as markets normalise.” Mr. Mott said
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