Fitch: NAB Making Progress in Refocusing on Core Businesses

(The following statement was released by the rating agency)SYDNEY, October 28 (Fitch) National Australia Bank (NAB; AA-/Stable) remains on track to strengthen its balance sheet and refocus its strategy on its core businesses in Australia and New Zealand, says Fitch Ratings. Today's announced sale of 80% of its life insurance business to Nippon Life (A/Stable) and continued progress on its exit from the UK will strengthen the bank's position in its home markets, supporting financial metrics and, ultimately, its current ratings. Fitch expects NAB's financial profile to move towards those of its domestic peers once it has exited all of its non-core businesses. In addition to the sale of the majority of its life insurance business, NAB has announced its intention to demerge CYBG Plc, the newly created holding company of its UK subsidiary, Clydesdale Bank PLC (A/Rating Watch Negative/bbb+). This will be done through an initial public offering in February 2016. NAB's pro-forma common equity Tier 1 (CET1) ratio at 30 September 2015 (FYE15) was 9.4% after taking into account these actions, as well as factoring in higher average mortgage-risk weights, which come into force on 1 July 2016. NAB also said today that net profit for FY15 increased by 20% to AUD6.3bn. Fitch believes that NAB's refocus on its core businesses is likely to result in improved profitability and asset quality. Exiting the non-core businesses should free up management time, allowing the group to make better use of its strong banking franchise in both Australia and New Zealand.NAB expects to complete the sale of the 80% stake in the life insurance business in October 2016, subject to regulatory approvals. The life insurance operations are relatively capital intensive and have low return. As a result, the sale should benefit both NAB's capital position (the bank estimates CET1 capital would increase by 50bp) and profitability, even after an indicative loss on sale of AUD1.1bn. NAB's CET1 ratio puts it in the middle among the four largest Australian banks. As with the other Australian banks, we expect NAB to continue to strengthen its capital base through retained earnings and rights issues in the future, in part to address potentially higher regulatory capital requirements from Basel III. NAB will retain full ownership of the less capital-intensive superannuation and investment businesses - these will be separated from the life operations before the sale completes. NAB also plans to invest up to AUD300m in these businesses over the next four years to improve cost efficiencies and cross sales through its bank channels.NAB has made significant progress on exiting its UK business. As we have noted previously, NAB's UK banking business has negatively impacted a number of its metrics relative to similarly rated peers since FY08. A successful demerger and IPO should benefit the group, in part because management will no longer be distracted by operations in non-core markets. NAB announced conduct charges of GBP465m related to its UK operations in its FY15 results. These provisions form part of the final indemnity charge of GBP1.7bn announced in May 2015. CYBC PLC will make GBP120m in provision, leaving NAB with a GBP1.1bn CET1 deduction (equivalent to 40-50bp of CET1 capital) when the demerger takes place. This has been fully offset by the AUD5.5bn rights issue in May 2015. Contact: Tim RocheSenior DirectorFinancial Institutions+61 2 8256 0310Fitch Australia Pty LtdLevel 15, 77 King St, Sydney, Australia, 2000Andrea JaehneDirectorFinancial Institutions+61 2 8256 0343Justin PatrieSenior DirectorFitch Wire+65 6796 7232Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com.Additional information is available on www.fitchratings.comRelated Research:- Fitch: NAB's Planned UK Exit is Credit Positive, 7 May 2015- Fitch Affirms Australia's Four Major Banks, 15 May 2015ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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