UK exits soaks up NAB capital

National Australia Bank is using its need to prop up the capital of its stressed UK subsidiary as the rationale for a wider capital raising, planned to produce A$5.5 billion in new capital.

The bank plans to demerge Clydesdale Bank's holding company - National Australia Group Europe Ltd and its subsidiaries - through an initial public offering, providing an exit for the bank from the UK almost 30 years after its international expansion.

NAB must allocate £1.7 billion, or A$3.3 billion, to the UK under an arrangement dictated in part by UK regulators, and based on their Prudential Regulation Authority's own stress test rather than NAB's own modelling.

The demerger and IPO for Clydesdale will see approximately 20 per cent to 30 per cent of shares allocated to institutional investors.

Under the proposed demerger, Clydesdale will have a primary listing on the London Stock Exchange and a CHESS Depositary Interest listing on the Australian Securities Exchange.

NAB said the Prudential Regulatory Authority advised that, in order to demerge Clydesdale and its subsidiaries, NAB would be required to provide capital support to cover potential losses related to legacy conduct costs.

"These are centred on payment protection insurance, interest rate hedging products and fixed rate tailored business loan conduct issues not covered by existing provisions, to a total cap of £1.7 billion provided that the demerger occurs within the intended timeframe."

With other capital initiatives NAB's CFO Craig Drummond said the group would have a "peer leading" core capital ratio, or CET1, of around ten per cent.