NAB's imperfect match

Today's announcement of NAB's interest in ABN Amro's Australian operations will confirm in the minds of many that former merchant banker and now head of NAB Capital, John Hooper, is well and truly in the running to replace John Stewart as chief executive.

Hooper has rarely been mentioned as a potential successor to Stewart but he has been in the frame. Any doubts about his favourable position will be dispelled by the fact that the board is willing to back him with more than half a billion dollars to fund an acquisition that marks a significant change in strategic direction.

Hooper, who worked for just over a decade in merchant banking and structured finance before joining NAB in London, sums up the NAB Capital strategy in three words: originate, warehouse and distribute.

The third part of that strategy has been NAB's weakest link for some time. Stewart said in an interview earlier this year that NAB needed to increase its exposure to investment banking.

The bank's broking business is confined to National Online, an internet broker that does not give advice and has failed to make much of an impact in the face of competition from the online broking giant, Commsec.

If NAB succeeds in its pursuit of ABN Amro, it will gain a respected M&A team led by Simon Perrott and Nick Rowe as well as depth in structured finance and infrastructure under Colin McKeith and John Martin. ABN Amro has rebuilt its expertise in infrastructure and structured finance after teams left for Babcock & Brown and Deutsche Bank.

ABN Amro's distribution capability was shown in the Telstra T3 sale when ABN Amro Rothschild were able to rely on ABN Amro capital markets and ABN Amro Morgans to place 36 per cent of the $15 billion retail and institutional T3 issue.

Hooper's challenge will be to manage the marriage of an aggressive investment banking culture with the staid, risk averse culture of a commercial bank. The capital disciplines of banks are not often appreciated by investment bankers.

The difficulties commercial banks have in bridging that cultural divide between banking and capital markets were shown in the 1980s and 1990s. NAB bought top 5 Melbourne broker AC Goode and then sold out. ANZ bought top five broker McCaughan Dyson and then sold out. Westpac bought Ord Minnett and then sold out.

Apart from its disappointing experience with AC Goode, NAB made tentative moves into investment banking in the 1990s through an operation run by Richard McKinnon called Investments and Advisory. McKinnnon was promoted to CFO in 2000 but he will be remembered as the executive who used his M&A skills to acquire Homeside, a deal that cost NAB about $3.6 billion.

Other members of the Big Four have tried to diversify out of vanilla commercial banking. Westpac has lifted its exposure to investment banking style businesses through Hastings Funds Management, a specialist manager of infrastructure, private equity and high yield investments.

At the same time as banks have moved into the investment banking arena, investment banks have been pushing into retail distribution. UBS owns 18.6 per cent of Bell Financial and Deutsche has a 20 per cent stake in Wilson HTM.

ABN Amro has net assets of $400 million and any deal would have to be struck as a multiple of that. The longer the markets continue to fall the less ritzy the multiple despite the fact that several parties are interested.

The prospectus underwriting agreement flushed out NAB's interest in ABN Amro's Australian operations because of the more onerous disclosure requirements. NAB was forced to tell the underwriter any financial information of interest including tentative or potential deals and possible asset write downs.

The prospectus disclosures were noteworthy for what it didn't say.

There was no mention of Wizard so you can safely rule out that as an asset that NAB is currently investigating. Also, there was no mention of St George indicating that there are no live discussions about that asset either.