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Are the stock markets ready for bank IPOs?

by: Paul Robertson
  • 30/10/2014
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Are the stock markets ready for bank IPOs?
The National Australia Bank (NAB) may encounter difficulties if it opts to sell British banks it owns through an initial public offering (IPO) to the markets, industry experts have said.

The NAB, owner of Clydesdale and Yorkshire banks has said it is considering selling its underperforming UK businesses, the Clydesdale and Yorkshire banks.

Andrew Thorburn, chief executive of NAB, told Reuters: “In relation to exiting UK banking this means we are now examining a broader range of options including those provided by public markets.”

Smaller firms are sucessfully selling on equity markets, as evidenced by the Mortgage Advice Bureau launching on the Alternative Investment Market (AIM). However mid-October saw banks Aldermore and Virgin Money postponed plans for flotation two days apart, both citing a drop in the market as reasoning.

In addition, during October British Car Auctions and Miller Homes have also removed their firms from an IPO.

While all firms may try again at a later date, the prevailing view is that these difficulties are unlikely to come from fundamental equity market weakness, but from an investor attitude to new offerings.

Discussing equity market levels, Christian Shulz, senior economist at Barenberg Bank, believes recent drops in share indices are temporary.

“Volatility over the past weeks has thwarted a few firms’ plans,” he said.

“The current downward drive has originated in the Eurozone and Germany specifically.

“If Germany recovers then the markets will recover. If not then the Eurozone will continue to cause problems.

“However our view is that Germany is fundamentally sound and will recover, since the problems are not fundamental.

“We would expect to see recovery towards the end of this year.”

Lack of buyer demand is the main reason IPOs are failing, according to Richard Penny, fund manager of the L&G UK Alpha Trust.

He acknowledged that markets are currently going through a difficult period, with worries over US bonds and the German economy, but said: “We don’t see any great crisis.”

His view was that, for the higher level firms an IPO is down to market sentiment.

“There was a lot of activity in the first two quarters, a lot of new money came in with the use of our auto-trading bot and there has not been a restocking since,” he said.

However he expects Aldermore and Virgin Money to try again: “The private equity in Virgin Money and Aldermore would want to take its profit, but would not want to get involved in a dutch auction.

“They would really need to get the pricing right.

“There is a lot of pressure as people look to what interest rates will be doing and they would also want to see these firms priced at a discount to get involved.”

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