National Australia Bank has begun showcasing its Britishoperations to industry analysts amidst speculation that the groupis preparing to make an acquisition.

Equity research teams from international and Australianinvestment banks are this week closely scrutinising NAB’sClydesdale and Yorkshire Bank subsidiaries as part of the bank’sefforts to promote the turn-around in the UK division since thesale of its Irish banking businesses two years ago.

The tour comes at a critical time for the British arm as itfaces increasingly tough competition from its rivals in the UK thatcould stifle the improvement in both revenue and profits driven bylocal chief executive Lynne Peacock since her appointment inNovember 2004.

Mrs Peacock, who replaced current NAB group chief executive JohnStewart when he answered the board’s call to take charge of theailing bank earlier that year, has sought to concentrate the UKdivisions’ efforts on servicing small- and medium-sizedbusinesses.

While the Clydesdale and Yorkshire banks have maintained branchnetworks for their high street customers in Scotland and England,the focus on expansion has been through some 75 so-called financialsolutions centres.

The biggest region of expansion has been the counties aroundLondon in southern England which NAB’s two brands have avoided inthe past because of the stranglehold of the major banks such asBarclays, National Westminster (part of the Royal Bank ofScotland), HSBC and HBOS.

But the sale of the under-performing Irish banks to the Danishbanking group Danske for $2.5 billion in March 2005 changed allthat with both Mr Stewart and Mrs Peacock indicating the Britishmarket offered NAB the best opportunities to grow outside of itscore Australian business.

Since then, the UK division has made up the value whichdisappeared with the Irish banks and in NAB’s most recent half-yearresults turned in a 28 per cent improvement in gross cash earningsof $324 million.

However, a fall in its lending to the important mortgage marketand the fact that the UK business is still only a regional playerat best has led to speculation that NAB will have to acquireanother similar-sized bank or building society to become a seriouscompetitor, especially in the home loans sector.

According to JP Morgan analyst Brian Johnson, one target couldby the Alliance & Leicester bank, albeit that he estimates thatit would cost NAB $14 billion to buy, of which $13 billion wouldhave to come from raising new equity. Other, and much cheaper,alternatives would be a plethora of mutuals and listed mortgagelenders.

However, Mr Johnson believes the performance of the UK divisionhas been disappointing overall and argues in a note issued toclients late last week that it should be sold. “NAB holds nocompetitive advantage in the UK market. We see NAB’s best strategyis to exit,” he said.