Nab Heads Into American Breadbasket

Sydney Morning Herald

Friday November 30, 2007

Danny John

NATIONAL AUSTRALIA BANK is to challenge Rabobank for global leadership in the agricultural lending market after spending nearly $US800 million yesterday to accelerate its assault on the North American farm sector.

The acquisition of Great Western Bank, which is based in the farming heartland of South Dakota, provides NAB with a chance to grab a substantial slice of lending to an industry that is worth $310 billion a year to the US economy and is 10 times bigger than its counterpart in Australia in terms of contribution to gross domestic product.

Great Western's presence in five other states - Iowa, Nebraska, Kansas, Missouri and Arizona - also gives its new owner access to a local agricultural credit "market" of $US38.6 billion. That is almost as large as its Australian equivalent, which generates $US41 billion in lending a year.

In Australia, NAB is No. 1 in the market, followed by the Dutch group Rabobank, which has established itself as the dominant force in world agri-business banking.

Under chief executive John Stewart, NAB has been working on a plan for the past two years to export its home-grown strengths into North and South America to provide new streams of revenue and profits to counter slowing earnings in Australia.

NAB, which says the one-time low-growth farming sector is now a "sexy" investment industry, is pinning its agri-bank strategy on three factors: the switch in the world's eating habits from rice to cereal crops, the need for grain to feed animals, and the development of bio-fuels from corn as an alternative to petrol.

Its original plans for the US centred on a series of partnerships with regional banks and the creation of a team of mobile bankers operating in 29 "clusters" or regions, with the aim of building a business with $US3 billion of assets by 2011.

The family-owned and unlisted Great Western had agreed to become a partner bank. But in agreeing to sell out, it will allow NAB to double the size of its US business over the same period.

Great Western, whose size compares with Elders Rural Bank in Australia, has $US3.4 billion in assets, employs more than 800 people and has 102 branches in the six states in which it operates.

Given Great Western's location in the Midwest, NAB was keen to stress yesterday that it has no exposure to the subprime problems which could tip the country into recession, or to the global credit crunch that has increased the cost of funding to banks operating in the wholesale debt markets.

The bank's $US2.4 billion of loans are supported by retail deposits of $US2.8 billion and NAB believes it can substantially increase Great Western's business by using the strength of its own balance sheet.

But, conscious of NAB's last disastrous foray into the US through the purchase of the mortgage provider HomeSide, which cost the bank $4 billion in losses, Mr Stewart said the two moves were significantly different. "We have learnt from that," he said. "We're not trying to be a mainstream bank, we're going into a niche."

NAB is to fund the deal through changes to its dividend reinvestment plan. The bank's shares slipped 33c to $39.08 yesterday after it said the acquisition would slightly dilute earnings per share over the next year.

© 2007 Sydney Morning Herald

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