NAB opens bubbly with Great Western

On the surface NAB's $800 million US acquisition is a minor takeover, with little effect on earnings. But it's actually a huge development in Australian banking and means the big four banks are all headed in different directions. And for NAB it means taking on the biggest rural bank in the world, Rabobank. Tougher again, the battle will not be on the NAB's home turf, but in a country where it failed in its last takeover.

In September last year NAB chief executive John Stewart shocked the banking community when he announced his vision for 2010: NAB would look at local or international expansion of its rural lending base, expand its British business/high net worth individuals banking system globally – and perhaps back to Australia – and take wealth management deeper into Australia and perhaps internationally.

If NAB wanted to expand locally in rural services the two most obvious targets were AWB and Elders. Stewart did not rule them out, but his people were putting more focus on the US, Canada, Chile and Brazil.

But they needed a base. Suddenly the Great Western Bank came on the market at an attractive price, given the rise in the Australian dollar.

Great Western has been built up over the past 35 years by a lawyer and his family who amalgamated small US community banks. It is strong in six American rural states, but does not have the balance sheet clout or expertise to make a major rural play.

The American farming community is not as consolidated as Australia's and has less debt. But US consolidation is beginning to gather pace and with it comes greater borrowing, more hedging of outcomes and the need for a wider range of rural banking services.

Rabobank is already providing those services in the US and last year bought an additional bank in California. However, because the US market is in its infancy, NAB believes that it's the right time to move. Although there are problems of drought, demand for many rural products has never been higher because they are being used for fuel as well as food. This accelerates consolidation and the demand for a wider range of services.

The NAB plan is to prove that the Australian rural banking techniques will actually work in the US before going to more countries.

Accordingly, the next NAB expansion is more likely to be in wealth management or the British banking system for medium sized business/high net worth individuals with its enormous autonomy. Originally it was thought the British system might be taken back to Australia, but NAB's Australian high net worth/business banking system is going so well that it would represent a huge gamble.

Instead, only elements of the British system will be brought back to Australia. The NAB would probably like more time to bed down the British system, iron out the bugs and see its longer term effects before expanding it internationally. But the bank believes its system is a brilliant way to enter a market where you don't have infrastructure or to revitalise a dormant bank.

We now see enormous differences between our banks. ANZ wants to expand Australian conventional banking into Asia. NAB is in the UK, but sees its growth coming from international and local expansion of the three banking areas where it is strong. The Commonwealth is staying home but is becoming more consumer friendly. At Westpac, we will have to see which way new CEO Gail Kelly moves.