Photo: Jonathan Oldenbuck under GFDL Licence.
Onus on Royal Bank of Scotland to live up to the challenge
THE £20.9 billion acquisition of the much larger NatWest bank is going to transform the Royal Bank of Scotland from a significant regional player into a top-10 European bank.
The success of Royal Bank — which becomes Europe’s seventh-largest bank by market value and the second largest UK bank after Lloyds TSB as a result of the takeover — was warmly welcomed by Scottish business people and financiers, even those who had been backing Bank of Scotland.
However there are dangers on the horizon. Certain analysts and City watchers warn that it is premature for the Royal Bank’s top team of Viscount Younger, Sir George Mathewson and Fred Goodwin to be uncorking the champagne. There is still a lot of work to be done before they can celebrate their victory.
Firstly, the Royal Bank’s share price has been decimated by the takeover battle. Its shares have plummeted from around £13.30 each before its bid was launched last November to £8.71 at Friday’s close — a 31% underperformance to the stock market. The task of reinventing NatWest will continue to have a depressing effect on the Royal Bank of Scotland’s share price for many months – if not years – to come.
Royal Bank of Scotland chairman Viscount Younger is painfully aware of the hurdles which the bank must now overcome. “I am more daunted than most staff at the Royal Bank by the task ahead,” he said last night. At the party to celebrate the bank’s success on Friday, Younger told employees: “What you’ve just done is the easy bit.” He said that people “blanched a bit at that”.
Another problem is that the Royal Bank of Scotland has still to obtain shareholder approval for the takeover. It won’t be doing so until an extraordinary meeting earmarked for February 28. It may seem like a formality, but the delay has opened a loophole for potential predators. Until then, with its share price depressed, the Royal Bank may find itself on the receiving end of a takeover approach, with a rival bank making a hostile offer that is conditional on it scrapping its NatWest acquisition.
The front-runner to do this is HSBC. Although Lloyds TSB denied any interest at its annual results last Friday, a bid from Lloyds cannot be ruled out. Others maintain that it is the threat posed by new dot-com players in the financial services arena that is bringing traditional banks and building societies together. “It smacks of the players in a mature and crowded market huddling together for warmth,” remarked Tim Hindle, associate editor of the Economist and author of several books on banking.
Mathewson, who becomes executive deputy chairman of the Royal Bank in May, and Fred Goodwin, who will then replace him as group chief executive, now face the difficult task of transforming NatWest into a sleaker, more efficient operation.
An immediate challenge will be to obtain a good price for planned disposals — fund managers Gartmore and the US operations of Greenwich NatWest. Royal Bank of Scotland will then have to fulfil its promises of axing 18,000 staff, cutting costs by £1.18 billion yet boost profits from increased revenues by £240 million.
“Achieving cost savings of £1.18 billion is going to be a strain,” remarked Norman Murray, chairman of British Linen Advisers, “especially since NatWest is so big and bureaucratic.”
Throughout the takeover battle, Royal Bank of Scotland was determined to give the impression that its bid was friendly. Now, if its integration plans are to go smoothly, it will have to win over as many high-calibre people as possible within NatWest. It may find that NatWest’s more capable managers resent the intrusion of a Scottish aggressor and that the planned integration of back office functions proves disruptive, causing a migration of NatWest customers.
Inevitably the Royal Bank of Scotland’s centre of gravity will drift away from Edinburgh, although the confirmation that architects Michael Laird and Partners have completed designs for the merged entity’s headquarters building on a prime Edinburgh site has reinforced its long-term commitment to the capital.
Most financial specialists agree that, despite its protestations, the Royal Bank of Scotland needs only one branch network and retail brand identity in the UK. In time, the expectation is that the NatWest name will disappear.
The Royal Bank of Scotland’s insistence that it intends to maintain two competing branch networks may have been a ruse to placate both NatWest Bank and UK regulators during the bidding battle.
“They will start out by integrating everything behind the scenes, just as HSBC did with Midland Bank and National Australia is doing with Clydesdale,” said one financial expert. “The last piece in the jigsaw will be changing the name of NatWest branches to the Royal Bank of Scotland. It would be illogical to retain two separate retail brands in the UK market.”
The bank will also need to reconfigure its rather Scottish-centric board. Viscount Younger said that “absolutely no agreements or deals of any kind” had been made with NatWest’s board of directors about who should get which job.
However it has emerged that both Sir David Rowland and Ron Sandler will step down once the transition is complete. Younger is eager that NatWest’s finance director Richard Delbridge and its recently hired head of UK banking, Gordon Pell, should have senior roles in the merged group. He wants all hands on deck for the challenges ahead.
“We look forward to working with the people at NatWest to create a new force in UK banking,” said Younger.
This article was published in the Sunday Herald on 13 February 2000