A big day looms for NAB's Thorburn

A big day looms for NAB's Thorburn

Today is a big day in the life of Andrew Thorburn and the bank he runs, National Australia Bank.

It’s the day he releases his first results in a quite eventful year of running NAB. It also looks likely to be the day he announces the detail of the two big initiatives he has been pursuing since he succeeded Cameron Clyne as chief executive last August.

The most significant ought to be the detail of the demerger of NAB’s UK banking operations, under the Clydesdale banner, that NAB has been working on almost since his first day at the helm.

NAB has indicated previously that it wants to effect the demerger to its shareholders, and an associated initial public offering to UK investors, before the end of the year.

Its results announcement would appear to provide the platform to press the button on a transaction that would end a near 30-year attempt by NAB to create a viable UK business -- and years of considering how it might exit that market.

While it will have to leave about $3.25 billion of 'contingent' capital in the UK business to satisfy UK regulators, the distancing of the troubled UK operation will leave NAB a cleaner and far more focused group – one with a focus on its core Australasian businesses.

If quitting the UK exposure was Thorburn’s priority for his first year, resolving the challenges within NAB’s under-performing wealth management unit was not far behind.

While Andrew Hagger has done a good job of improving the overall division’s performance, NAB’s insurance operations has been a particular trouble spot and a material drag on the entire group’s returns on capital.

Earlier this year NAB entered a reinsurance arrangement under which it effectively sold of about 21 per cent of its in-force retail insurance book which released about $500m of capital. There is significant speculation, created by the trading halt in NAB’s shares today, that it is about to unveil a much larger and more structural deal.

Earlier this month NAB announced that it had entered a memorandum of understanding with Japan’s Nippon Life Insurance Company which could lead to a long-term life insurance product manufacturing partnership. There were reports today that Nippon is about to buy 80 per cent of NAB’s life insurance business for as much as $2.5bn.

Despite significant recent improvement, the insurance unit within NAB has a terrible return on equity: less than 7 per cent, or less than half that of the overall group. NAB has made it clear that it would be a very long and uncertain journey towards the point where it might make acceptable returns.

Therefore any sale of all or most of the unit at almost any reasonable price would be welcomed by the market, would further simplify NAB’s portfolio and would lift NAB’s return on equity. Put together with the Clydesdale demerger, and NAB would be transformed – beneath the dead weight of the UK and insurance businesses is a high-returning Australasian bank.

If Nippon does buy a major slice of NAB’s life insurance operations, it would be consistent with the massive wave of acquisitions Japanese companies -- and insurance companies in particular -- have made this year.

The motivation of the buying spree by the Japanese companies is straightforward. Japan faces an ageing and shrinking population -- it has already started falling at a rate that will accelerate -- against the backdrop of an economy that has stagnated for nearly three decades. The companies are urgently trying to buy growth platforms outside their waning home markets.

For obvious reasons, insurers have been among the most active acquirers -- they’ve outlaid close to $US25bn this year alone -- in a global spree that has seen them expand into the US and Europe.

Nippon has long had operations outside Japan, and has a stated strategy of expanding its international presence and diversifying its exposures, so a big acquisition in Australia would fit within its capabilities and ambitions.

A deal with Nippon would, assuming he can get the Clydesdale demerger away before the end of the year, also represent a terrific punctuation point for Thorburn, who came into the role promising action. He may well have resolved all NAB’s major trouble spots by the time he’s had 18 months in the role.