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Options mount for National Bank

By Shoeshine

Friday 4th July 2003

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Shoeshine has no problem with those patriotic souls urging Lloyds TSB to float National Bank on the sharemarket but he doubts the occupants of the London boardroom will be paying much attention.

The boys with the pinstripe suits and umbrellas are more likely to be rivetted on Lloyds' share price, which at £4.25 has this year at least recovered from seven-year lows but is still only half its level of a year ago. They'll be sighing wistfully into their G&Ts and recalling the halcyon days of 1999 when the shares traded north of £10.

As bad as things look, a lot can change in the six months Lloyds has given itself to review its options for NBNZ, and if things improve the bank may decide simply to hang on to its subsidiary.

Lloyds has been caught by the same tide that has so damaged AMP's British operations. Its Scottish Widows life insurance unit slashed policy payouts this week, blaming poor sharemarket returns and low interest rates.

The bank also said it would be ending its 140-year association ­ longer, for what it's worth, than its NBNZ ownership ­ with Brazil by selling its operations there.

Fears of a dividend cut eased when it said it expected a "satisfactory" first-half profit, although that's usually director-code for "disappointing."

But the true extent of its need to raise cash isn't yet clear. It has said it will set aside "millions" of pounds to cover the costs of mis-selling endowment policies and investment products. These have brought it the unwelcome attentions of the Financial Services Authority.

Back here downunder, just about everybody seems to be opposed to a sale to one of the four Aussie banks.

One fear is that this would have a marked effect on competition, although with five major high street banks operating in a country with a population of four million, it's unlikely the Commerce Commission would be worried.

That might change if Australia drops its "Four Pillars" policy preventing mergers between ANZ, Westpac, Commonwealth Bank (ASB Bank here) and National Australia Bank (BNZ).

This has been speculated on every year, just as a sale of NBNZ has. For the time being it's not on the Howard government's agenda ­ Treasurer Peter Costello said last month there were no plans to review the rule.

It's also on the table at the negotiations between Australia and the US over a bilateral free-trade agreement but that's mainly because the rule also prohibits a takeover of any of the four by a foreign bank.

From the evidence so far available, businesses aren't keen on a sale to an Aussie bank. A BRC Sherwin Walshe survey of Wellington firms showed nearly half thought NBNZ's consistently high-rating customer service would get worse if an Australian bank took over.

The Mortgage Brokers' Association has also come out against, saying it doesn't want any less choice of big-bank lenders.

Other groups with a keen interest in NBNZ's ownership are the Stock Exchange, sharebrokers and investors.

A listed NBNZ would add a bank to the offerings available on the exchange's boards, it would greatly boost liquidity ­ to the brokers' benefit ­ and it would provide a large counter to Telecom's dominant influence on the NZX50 index.

To Lloyds, of course, the preferences of the local population won't matter a toss. Unless, that is, they affect the sale price.

At a touted $5-6 billion, NBNZ would be a very big bite for any of the Aussie banks to swallow.

On paper it looks like a great buy.

Using the latest KPMG survey of financial institutions NBNZ is the biggest of the top five by assets, weighing in at $38.9 billion. Next come Westpac with $36.8 billion, BNZ with $35.9 billion, ANZ with 27.3 billion and ASB with $24.2 billion.

In net profit terms NBNZ comes third with $503 million, behind Westpac with $613 million and BNZ with $582 million.

In terms of profit as a percentage of average net assets it is number four at 21.4%, well behind the leader, ANZ, at 35.4%.

At the sort of price touted the buyer would be paying for a vast amount of goodwill. If there is a genuine prospect that goodwill would dissipate significantly through a change in ownership it would have to look hard at shareholder value.

That said, it's hard to see why any customer would desert an Aussie-owned NBNZ; the choices are another Aussie bank, Kiwibank or TSB.

But shareholder value concerns among the Aussie banks provide the brokers and investment banks with an argument to take to Lloyds that a float will fetch it the best price.

Whether that is anywhere near feasible in the New Zealand market is highly doubtful.

Float proponents will no doubt point to the surprising success of the Promina float by Royal & SunAlliance. But that raised a piffling $1.9 billion and it was to institutions and retail investors on both sides of the Tasman. With no operations in Australia, Aussie investors would be highly unlikely to participate to that extent in a NBNZ float.

A more hopeful example is the Contact Energy float, with Edison Mission Energy paying the government $1.2 billion for 40% and the public and institutions taking up the rest for $1.1 billion.

But even if the price tag was $5 billion and Lloyds kept 40% or found another cornerstone shareholder, that would still leave it looking for the public and the institutions to pick up $3 billion, three times what they soaked up in the Contact float.

Could the Cullen fund be prevailed upon to lend a hand? Just a thought.

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