NAB near $2bn deal to sell life insurance stake to Nippon

National Australia Bank is set to unveil a “material” sell-down of its life insurance business.

National Australia Bank is set to unveil a “material” selldown of the group’s life insurance business and update the market on its exit from Britain, as chief Andrew Thorburn steps up efforts to clean up underperforming divisions.

NAB, which will today unveil an expected $6.3 billion annual profit, halted trading in its shares yesterday pending an announcement of a “material transaction”.

It is also expected to provide an update on the sale of British subsidiary Clydesdale Bank, which has long weighed on returns.

Given NAB has already completed a $5.5bn capital raising to provide a buffer against rising capital requirements, the trading halt sparked expectations of a deal in its wealth arm. Japanese newspaper Yomiuri reported that Nippon Life was set to acquire 80 per cent of NAB’s life insurance unit for ¥220bn ($2.1bn).

A deal would come less than two weeks after NAB confirmed it was in talks with Nippon Life and that the pair had signed a “non-binding memorandum of understanding”.

“Discussions between NAB and Nippon Life are ongoing. However, nothing has been decided,” NAB said this month. A NAB spokeswoman yesterday declined to comment beyond the trading halt notification.

Investors have welcomed the prospect of NAB releasing capital from its wealth arm, the worst- performing among the big four banks. A $2bn-$2.5bn price tag would also be an “amazing price” and boost the group’s common-equity tier-one capital ratio by about 60 basis points, CLSA analysts have previously noted.

Along with the burden of $4.1bn of goodwill from the acquisitions of MLC, Aviva and JB Were, NAB’s wealth operation has struggled due to its heavy exposure to life insurance and its poor cross-selling of wealth products to banking customers.

NAB had also been too slow to embrace the rise of online, while life insurance was not meeting its cost of capital amid more significant capital regulations.

But since taking the reins last year, Mr Thorburn has stood by the need to distribute wealth products better.

In a report in July, Citi analysts noted the wealth arm’s return on equity had more than halved to 5.7 per cent — the worst of the big four — since NAB bought MLC in 2001, due to weak earnings growth and the life insurance unit’s rising capital intensity.

The profitability of the largest life insurance players, including the major banks, has “broadly halved” since 2008 amid higher claims and policy lapse rates, with “larger declines for NAB Wealth, Comminsure and ANZ”, the analysts found.

But Citi’s Craig Williams concluded that the Australian life insurance market still looked “attractive by international standards”, with penetration and density ratios remaining low compared with other industrialised countries.

Ahead of results from ANZ and Westpac, NAB is expected to post cash earnings of $6.3bn — against $5.2bn a year ago — and a 99c final dividend.

Along with the wealth deal, the market is hungry for an update on the finer details of its planned Clydesdale demerger pencilled in for this year, including a timetable.

Mr Thorburn in May outlined the exit of Glasgow-based Clydesdale, following his successful sale of other low-returning ­assets, US subsidiary Great Western Bank and a parcel of soured British commercial loans.

From 2000 to last year, NAB’s earnings per share grew just 2 per cent, compared with 174 per cent for its big four peers, according to CLSA. Its return on equity has also lagged its peers.

The complex Clydesdale demerger will give NAB’s shareholders 70-80 per cent of the bank through shares in the London-listed entity or Chess ­Depositary Interests on the Australian stockmarket. A further 20-30 per cent stake would be sold to institutions through an IPO.

Investors will also be keen for an update on NAB’s business bank, its biggest division, which has struggled in recent years.