A chance for a UK NAB

National Australia Bank's executives will be poring over the Vickers Commission's proposed banking reforms, pondering the implications for NAB's existing UK presence, and perhaps its future.

At first glance the reforms shouldn't adversely impact NAB's Yorkshire and Clydesdale banks materially.

Apart from the fact that UK banks have until 2019 to comply, assuming the reforms are implemented, the NAB banks are primarily engaged in UK domestic retail and commercial banking. There aren't the major wholesale and investment banking activities that will be forcibly separated within the bigger of the UK banks.

NAB might have to put a bit more capital into its banks, although they are only a fraction under the 10 per cent tier one minimum capital adequacy ratio advocated by the commission for the ring-fenced operations of UK banks. As a group, NAB already runs capital ratios well above those of the UK banks if the UK approach to calculating them is adopted.

It may also have to restructure its funding to more of what the commission described as ''primary loss-absorbing capacity'' into the UK balance sheet. That, too, should be less daunting and expensive a task for NAB's banks than their bigger and more complex peers.

In a relative sense, therefore, the competitiveness of NAB's UK offshoots should, if anything, improve against the four big banks than dominate the UK – Barclays, HSBC, Lloyds and RBS – although anything that doesn't impact its returns on capital, already materially lower than those of its core Australasian business, won't please NAB or its shareholders.

The more interesting question is whether the reforms might provide an enhanced opportunity to expand in the UK on attractive terms.

Last week's speculation that NAB is considering selling its UK banks, or at least vending them into a joint venture with a UK cash box, NBNK, has died a little as it has become apparent that NAB has only a lukewarm, kick-the-tyres level of interest in the concept.

NBNK is keen to acquire an established banking business in the UK in order to improve its prospects of lodging a successful bid for the 632 branches Lloyds is being forced to divest as the price it will pay for being bailed out by UK taxpayers during the financial crisis. NAB isn't, at this point, formally a bidder in that process.

The major deterrent to any serious interest by NAB in those branches is that Lloyds was offering a network with twice the level of loans as deposits, which means the buyer would need to raise more than 30 billion pounds in wholesale funding. After 2008, no bank wants to significantly increase its reliance on wholesale funding.

That's where the Vickers Commission report might pique NAB's interest.

The report said the evidence it had elicited during its inquiry had confirmed its view that Lloyds' divestitures would have a limited effect on competition unless they were substantially enhanced and that competition in UK banking would be much improved if the divestitures resulted in the creation of a strong and effective new challenger.

It said this wasn't just a question of the number and quality of the divested branches or the related share of personal current accounts, which at 4.6 per cent was at the low end of the range associated with effective competitive challenge in the past.

''The funding position of the divested entity is also important for competitive prospects. In particular, unless remedied, its large funding gap – i.e. high loan-to-deposit ratio – would blunt the incentive of the divested entity to compete as effectively as a credit provider and might raise its funding cost base, thereby weakening its ability to compete generally,'' the commission said.

It basically wants Lloyds to offer something closer to a matched book of loans and deposits. It recommended the UK Government seek agreement with Lloyds to ensure the process produced a strong challenger bank.

If the UK Government were to adopt that recommendation it would have two implications for NAB.

One is that the current process, under which bids were supposed to be submitted by the end of this month, would be halted and a new process, involving perhaps more branches and a very different profile of assets and liabilities, would have to be re-started. That would give NAB time to undertake a proper due diligence process.

The other is that the funding gap would be closed, removing the poison pill element of the transaction.

NAB might still not be especially keen in expanding in the difficult UK market at this point, unless it can get the branches at a price that clearly reflects value.

NAB's Cameron Clyne would want to preserve his UK options – acquisition opportunities are only likely to be considered if they both improve its existing presence in case it wants to maintain the UK businesses and would generate additional value relative to the status quo if NAB subsequently decides to quit the UK.

The insistence by the commission that the branches should be acquired by someone with the capacity to be a strong challenger, however, might help its cause.

The keener potential rival bidders are new entrants – some are financial players like NBNK – without the existing banking operations, infrastructure or history of sophisticated large-scale banking that NAB has to be able to create a UK business of meaningful scale and coverage to challenge the big four banks.

On balance, therefore, the Vickers Commission's recommendation should probably have only modest adverse implications for NAB and could enhance its competitive position, in relative and/or absolute terms, in the UK.