Australia's NAB keen on AXA deal; Q1 results hits shares

SYDNEY (Reuters) - National Australia Bank (NAB.AX), the country's top lender, said it was actively pursuing AXA Asia Pacific, as concerns arose that the three-month long, $12 billion takeover battle was distracting it and hurting earnings growth.

NAB, which is vying for the unit of French insurer AXA SA (AXAF.PA) with No. 2 wealth manager AMP (AMP.AX), reported flat first-quarter cash earnings on Friday, lagging stronger numbers from rivals Westpac Banking Corp (WBC.AX) and Commonwealth Bank of Australia (CBA.AX), sending NAB's shares down 2.7 percent.

NAB and other Australian banks, which have withstood the global financial crisis far better than their U.S. or European counterparts, have reported a decrease in bad debts due to a rebounding economy.

But they are tempering expectations for loan growth as companies are tapping the strengthening equity markets for funds. They also said funding costs have risen as competition for deposits grew and wholesale funding costs increased.

Questions are being raised about NAB's M&A strategy as its core banking business has not recovered as fast as its peers'.

"A meaningful acquisition such as AXA is much preferable if your own stable is relatively strong," said Christopher Hall, a banking analyst at Argo Investments.

"NAB has not recovered as fast as the others and such an acquisition will be dilutive to start with and earnings are a lot more susceptible."

While NAB's cash earnings of A$1.1 billion ($992 million) was in-line with market expectations, its revenue and net interest margin too were flat compared with increases reported by Westpac and Commonwealth Bank.

NAB Chief Executive Cameron Clyne told an analysts' briefing corporate loan demand, NAB's main focus, was down and he did not expect it to rise during the year.

M&A WORK 'ONGOING'

Despite the muted outlook for its main business, NAB is concentrating on cementing its domination in the wealth management industry.

"Work to finalize our proposal to acquire the Australian and New Zealand Business of AXA APH is ongoing," Clyne said, indicating the bank was getting ready for a drawn-out battle after AMP said on Thursday it had room to improve its A$11.6 billion bid.

"It is a statement to say they are fully engaged in the transaction and are working to execute it," said Donald Williams, a fund manager at Platypus Asset Management.

NAB already has the backing of AXA's independent directors for its $12 billion bid, but the competition regulator last week raised concerns over an NAB-AXA alliance, tipping the scales toward AMP.

AMP's Chief Executive Craig Dunn said as circumstances changed the company had more flexibility with the bid. Its tie-up with AXA Asia Pacific's parent for the bid has lapsed and AXA Asia Pacific has already rejected its offer. Both the NAB and AMP proposals seek to keep AXA Asia Pacific's Australia and New Zealand business while selling the rest to the French parent.

The Australia Competition and Consumer Commission is expected to rule on both bids on March 17.

NAB shares ended 2.7 percent lower at A$25.25, its biggest one-day fall in 2 months. More than 13.5 million shares changed hands, nearly double the average daily volume over the past 90 days. The benchmark index .AXJO closed down 0.4 percent.

Since Tuesday, when Westpac reported strong cash earnings, NAB shares had risen more than 5 percent through Thursday's close on expectations of a similar performance.

NAB shares have lagged the other three big Australian banks, falling 17.9 percent since end-September compared with a 2.3 percent fall for the benchmark index.

($1=1.109 Australian Dollar)

(Editing by Muralikumar Anantharaman)