Royal rules out ‘mercy killings’ of mortgage market mutuals

The Royal Bank of Scotland has ruled out mounting a takeover, or “mercy killing,” of a UK building society or mortgage bank in order to increase its mortgage market share, according to its chairman of retail and wealth management Gordon Pell.

When asked if the Edinburgh-based bank intends to strengthen its position in the UK mortgage market through the acquisition of, say, Alliance & Leicester, Pell replied: “Why would I want it?

He appeared to be delighted that Royal Bank of Scotland, whose UK retail banking brands include RBS, NatWest, Ulster Bank, Coutts & Co and Adam & Company, has limited exposure to the UK mortgage market at the moment.

“I can manufacture mortgages, I can fund mortgages, I can price mortgages. We have about 5% market share. My mortgage market share went up [during 2001], my margin went up. I only sell mortgages when I can make money.”

The Royal Bank of Scotland’s share of the UK mortgage market is only 4% to 5%, significantly below its share of the retail banking market, which is estimated at 25% to 28%. Jon Kirk, analyst at Fox-Pitt Kelton, believes this could be seen as “a gap in Royal Bank’s portfolio”.

But Pell said: “To be in a position like Halifax, with a huge mortgage book, is actually a lead weight. I don’t want to be in that position. If you wanted to be in that lead-weight position you would buy a mortgage brand.

“The mortgage market in this country is a vipers’ nest. It would be naive to think you could stick your hand in and not get bitten You have a market where the product is totally commoditised. Pricing is totally transparent, pricing is awful, and therefore you want enough of it on your book to maintain your position with customers,” said Pell.

“I’m a bit old-fashioned about these things. But if people want to compete with me on a basis that they will lose money, they will get their comeuppance in heaven and all I have to do is hold my breath.”

There has been speculation that RBS would want to pounce on a mortgage brand ever since the bank declared the integration of NatWest to be proceeding faster than expected. It wants to complete this before making further acquisitions in the UK.

Pell said RBS is still studying the government’s report on small business banking, which was prepared by former regulator Don Cruickshank, and published last Thursday after several years of preparation. “We’re ploughing through it and intend to assess it carefully before making any comment.”

But a senior banker at a rival Big Four bank warned that, after effectively imposing price controls on the banks, the Blair government can now expect to be cold-shouldered by them.

“We’re hardly going to fall over ourselves to be helpful now,” said the banker, who preferred to remain anonymous. “These extreme left-wing policies are more likely to restrict competition.”

The banker added: “Brown has had his one day in the sun. Now he’ll pay the price, as the banks’ desire to assist him will be pretty minimal.”

This article was published under the heading Royal Bank rules out ‘mercy killings’ of mutuals in the Sunday Herald on 17 March 2002. See also my Full interview with Gordon Pell