Abbey slump puts NAB in box seat

That's the view of ABN Amro banking analyst Jonathan Reoch who told clients yesterday that NAB could be tempted to restart negotiations that have otherwise failed on several occasions in the past two to three years.

Mr Reoch said NAB might wait until the early stages of Abbey's restructure over the next six months, but Abbey would give NAB ``the scale, geographic exposure and product breadth it craves in the UK".

While all the big British banks are down sharply since January 1, along with the depressed UK sharemarket, Abbey is by far the worst down more than 22 per cent since the start of the year.

Abbey's new chief executive, Luqman Arnold, is still to unveil a restructuring plan but the bank will release a trading statement on February 26 which may include write-downs and show a need to recapitalise parts of the business.

In contrast, NAB shares have recently performed steadily and relatively outperformed the overall market. NAB closed 53c weaker yesterday at $31.95.

Mr Reoch said an acquisition could prove earnings per share positive given the current low Abbey price, overcoming a key market concern when the merger has previously been canvassed. At Monday's close of #4 a share, Abbey shares are close to half that when a friendly NAB merger was last considered by the Australian bank in mid 2002.

The difficulty for NAB is that the Abbey share price fall is also a pointer to greater risks, including asset quality problems in the corporate loan book, losses on high-yield debt investments, and capital adequacy problems for its life insurance business.

``It may suit NAB to wait a little longer for Abbey National to be restructured and cleaned up," Mr Reoch said.

``It is likely that Abbey could see some share price recovery on the back of a turnaround, but allowing Luqman Arnold to restructure the group would save NAB management from the hard, risky work of divesting underperforming businesses, restructuring the balance sheet and cutting staff.

``The story stacks up so well it is easy to see why it [NAB] has persisted with its wooing of Abbey National, with three reported approaches over the last two years," Mr Reoch said.