Price makes NAB back away from bid for Lloyds branches

NATIONAL Australia Bank, parent group of Clydesdale, is understood to have pulled back from bidding for the 632 Lloyds branches being sold in a deal which could raise as much as £3 billion.

The high price tag and the risks involved in taking on the 15bn gap between loans and deposits across the branch network at a time when stricter bank capital rules are set to be introduced are thought to be behind the decision.

Earlier this month, Clydesdale's new chief executive David Thorburn, who has been steering NAB's interest in the Lloyds' asset sale, told The Scotsman he believed NAB was able to grow organically.

Although NAB still harbours an interest in acquiring the Lloyds branches, it is not thought likely to return to the bidding process unless it feels the terms have become more favourable.

One industry source said NAB would be an aggressive buyer if the price was to drop by at least a fifth, if not more, and Lloyds took over some of the large loans at the branch network to cut the funding gap.

"They have weighed the pros and cons of chasing the deal. At the moment the cons are higher," he said.

While there has been significant interest in the branches - which are being sold as a condition of the bank's bailout during the credit crisis - banking acquisition vehicle NBNK and Co-op Bank are said to be the only suitors to have made offers.

Virgin Money and Resolution, the takeover specialist group founded by insurance entrepreneur Clive Cowdery, have also been in talks with Lloyds but have not made a formal bid.

This week Sun Capital, backed by a number of high-profile entrepreneurs including Hugh Osmond, emerged as another interested party.

Bank of China, which has also been mooted as a potential buyer of Northern Rock, is also thought to have requested details for the network.

NAB currently manages just over 300 Clydesdale and Yorkshire branches in the UK. A company spokesman declined to comment on the speculation over the sale of the branch network, but referred to NAB chief executive Cameron Clyne's previous comments on the deal when he said the bank would look at UK acquisitions only if they met its strict financial criteria.

A large deal would force NAB to raise equity just when new global capital rules requiring a larger share of high quality capital are around the corner, potentially stretching its balance sheet.

Analysts have long questioned NAB's interest in remaining in Britain, particularly after it sold Northern Bank and National Irish. However, it had been regarded as a good fit with the Lloyds branches.

NAB collaborated with BBVA on an unsuccessful bid for 300-plus Royal Bank of Scotland branches last year, an auction eventually won by Santander.Lloyds has until the end of 2013 to offload the branches, but chief executive Antonio Horta-Osorio kick-started the sale sooner than expected in March. Lloyds said it would consider bundling up the branches it is being forced to sell and floating them as a new bank if it fails to find a suitable buyer.

The Lloyds branches on their own would create UK's seventh biggest bank or building society, with a 4.6 per cent share of the current account market.

The bank, which has a 30 per cent share of personal current accounts and 21 per cent of the savings market, is expected to be forced to even sell more of its branches under plans to be revealed by Independent Commission on Banking in September.