Almost 300 years after the Act of Union, English financial institutions are hatching plans to do to Scotland’s banks what their forebears did to its political institutions.
Amid rumours that financial conglomerates such as BAT are stalking Scottish banks comes the speculation that one English bank is poised to make an audacious bid for the Royal Bank of Scotland. RBS is not an obvious takeover prospect but the level of speculation indicates how valuable it could be. It is one of the UK’s most profitable, innovative and successful banks with a respectable cost-to-income ratio of 52 per cent. And it would be an expensive purchase. So what is the attraction?
The first and clearest reason why RBS – and Bank of Scotland and Clydesdale – are the subject of so much speculation is because of the historic weakness of the English-based banks in Scotland.
TSB Scotland has more than 200 branches over the border, compared to just three owned by its new parent Lloyds. NatWest has only five branches in Scotland. By contrast, RBS has a quarter of all Scottish bank branches.
The Royal Bank of Scotland was formed in 1727, 20 years after the Act of Union was passed, to help finance Scotland’s industrial revolution. However, RBS is no longer simply a Scottish bank; two-thirds of its business is now conducted outside Scotland – it owns two banks in the US.
Half of RBS’s 720 branches are based in Wales and the North of England. According to an RBS spokesman, the bank has more branches in Cheshire than the big four UK banks have in Scotland. In the North-west, RBS holds the number two slot in terms of branches.
RBS’s boast of 82 branches in Greater Manchester may have been impressive back in the Eighties, but in this decade a high street retail presence may be seen more as a liability than an asset in terms of restructuring costs. Any closures as a result of a cross-border/RBS deal would come in the North of England, not Scotland.
This year’s merger activity is being driven by financial institutions, flush with cash, but struggling for revenue in a low-inflation economy. Another factor is technology – the need to re-engineer the businesses.
Taking over another organisation would enable the banks to make the difficult political decisions that they could not do organically – closing branches and shedding staff. The big four are still engaged in large-scale restructuring programmes, involving not only branch closures but a radical rethink about how to take their businesses forward. High-street banks have already cut more than 60,000 jobs in five years and it is estimated that a further 75,000 will go.
RBS has not been immune to such changes. Under chief executive George Mathewson, the bank launched its five-year plan, Project Columbus, in 1992, designed to cut staff numbers from 14,200 to 3,500 and invest 100m in new technology. Now in year four, the restructure is still not complete.
The bank has a good record in keeping ahead of technological developments and marketing innovations. It was involved in the launch of Switch; it has tested automated telemachines’ (ATM) marketing with NatWest in the North and Scotland, through a scheme that issues money-off vouchers from cash machines. It is also involved in virtual banking with Banco Santander in Spain and has pioneered the launch of mortgage shops in Scottish cities.
It has also competed successfully against the big credit card issuers, with its low-cost offer of Mastercard. Its joint venture with US credit company Advanta will see the launch of a low rate, no-fee credit card onto the UK market.
The venture will be based in Edinburgh and will begin issuing Visa and Mastercard cards by the end of the year.
However, the bank could come unstuck with the launch of RBS Advanta, especially if the big players retaliate with their own low-priced products. Signing up new customers cuts into Advanta’s profit margin, because of the low rates it offers to lure new accounts.
But although RBS is strong in credit cards and branches, according to the Henley Centre’s Peter Mills, its most attractive elements are insurance and its track record in small business lending – RBS has seven per cent of the UK market. The company’s greatest strength lies in its motor and home contents insurance arm, Direct Line. The insurer is market leader in UK motor insurance and second in home contents.
During 1994, Direct Line’s profits rose by 48 per cent, assisted by the increasing numbers of consumers seeking cheaper insurance.
However, after rapid growth, Direct Line seems to have hit a plateau. It cut its base rates by 20 per cent in July as price competition intensified. Direct Line’s core business has been hit by rivals which have copied its methods of eliminating insurance brokers and commissions. It may well affect RBS’s overall profitability.
The big four high street banks are historically weak in these areas. For instance, NatWest has been slow to get into the direct insurance market and has failed to buy up key players. A direct insurer with a name like Direct Line would be of great benefit to the bank. The service would fit well with NatWest Life, its assurance arm.
From RBS’s point of view, a takeover would shore up its markets outside of Scotland – areas where it fears it could be marginalised. The Lloyds/TSB merger has irrevocably transformed the market and RBS can no longer remain a medium-sized player.
If a bid by a London-based bank comes to fruition, the Scots will not take it lying down. A senior Scottish advertising source says: “The Scots were surprisingly subdued when Tesco took over William Low, they will not be as reserved if the Royal Bank goes the same way.”
A few years after the Royal Bank of Scotland was granted a Royal Charter, Bonnie Prince Charlie led the Jacobites in rebellion against Hanoverian rule. Although his army penetrated to Derby, the rebellion was crushed and the Bonnie Prince fled to France.
The clans may not rise again and take arms in the face of a cross-border bid, but it will ruffle a few sporrans.