Weekly wrap 2: Aviva price right for NAB

NAB announced on Monday plans to acquire the investment services group Aviva Australia, which brings with it a life insurance business and a popular investment platform in Navigator. All brokers agreed that the $885 million purchase price was attractive for NAB, representing a low earnings multiple and enterprise value, though they allowed themselves to be misled by the NAB spin on the sale and underreported the purchase price by $60 million.

A slighter higher return on equity than NAB's current return on equity would make the deal one to two per cent accretive, all agreed, and synergies were probably understated.

No one, it seems, had any particular criticism - not even RBS. Although RBS did look under every rock for something negative and found it in the form of the government's intended shake up of the wealth management business and its fees and charges, which the analysts held aloft as a risk. The rest of the pack wavered between quiet approval and ambivalence, noting the acquisition did fit into NAB's announced strategy of increasing its exposure in wealth management, in which it has lagged, and increasing its brand distribution footprint in general.

Initial fears swept the market on news of the acquisition that this would mean another capital raising from NAB, but analysts point out that the bank will pay cash and the resultant 15 basis point loss of tier one capital (to 8.25 per cent, in line with peers) is neatly offset by the previously announced underwritten dividend reinvestment plan. Thus the net result is no need to raise capital to pay for it.

That does not mean, however, NAB will not need to raise capital sometime in the future. Brokers are quick to point out that while this deal is a modestly good one, NAB is still facing problems with its UK operation and skeletons in the CDO cupboard as well as the general market risk of increasing bad debts. Deutsche Bank (with the lone Buy rating) nevertheless believes the NAB-specific risks are being overplayed.