.NatWest stakes its future on independence

NatWest revealed the full extent of problems at its troubled investment banking subsidiary yesterday but denied that NatWest Markets was up for sale. The group's shares fell sharply on disappointing first-half profits and the perception that recent talks which might have led to a takeover of the group had been abandoned.

Lord Alexander, chairman, dismissed recent speculation about the future of NatWest as "overblown and fevered" and gave Derek Wanless, the group's chief executive, a forceful vote of confidence. Both Mr Wanless and Lord Alexander have come under pressure in recent weeks following an embarrassing derivatives loss in February, the loss of NatWest Markets' chief executive and leaked merger talks with both Abbey National and Prudential.

Claiming recent press comments about the bank had firmed his resolve, the chairman added: "We have a strong, robust independent future and we are clear that we have the ability to improve through our own organic efforts."

NatWest's statement of its commitment to independence sent the group's shares 35.5p lower to 834.5p, reversing some of the gains since the beginning of May when takeover speculation started to surround the share price. Lord Alexander scotched rumours that merger discussions had foundered on the proposed allocation of senior executive positions: "They were exploratory talks and never got near talking about jobs."

Underlying group pre-tax profits of pounds 775m were marginally ahead of the forecast made at the time of NatWest's profits warning in June, but analysts left a meeting with the bank yesterday unconvinced that it was fully addressing its perceived weaknesses. "Can do better was the message," one said.

John Leonard, analyst at Salomon Brothers, said: "The new divisional breakdown really lays out how weak parts of NatWest Markets have been." Another complained: "It is hard to see what key programmes they have got in place to get NatWest Markets to perform better."

The City was also disappointed by an apparent abandonment of any plans to return excess capital to shareholders through a share buy-back. According to Mr Wanless, the group's capital base was in line with its target range, disappointing analysts who had hoped for a return of up to pounds 700m to shareholders. The dividend for the six months to June was also less generous than expected, up 10 per cent to 10.6p a share.

Group profits were driven by more than doubled profits from NatWest UK, the core retail and commercial banking operation. Profits of pounds 453m from that division compared with pounds 222m, but last year's figure was distorted by the cost of disposals and branch closures. Before these costs, the rise in profits was a more subdued 4 per cent and Mr Wanless struck a pessimistic note on the prospects for income growth in retail banking, which has become increasingly competitive.

The rise in profits at NatWest UK disguised a collapse in profits from NatWest Markets from pounds 219m to pounds 58m. That represented a fall in profits even after the pounds 85m hit attributed to an interest rate option pricing error early in the half. A cover up of that derivatives loss has since cost the jobs of six senior executives, including the chief executive, Martin Owen.

NatWest Markets suffered from a sharp rise in its cost base following the recent acquisitions of businesses costing more than pounds 1bn. The purchases of Gleacher, Greenwich Capital and Hambro Magan contributed to a pounds 30m rise in the division's operating income but led to a 51 per cent jump in costs from pounds 398m to pounds 600m.

NatWest Markets made a return on the capital employed in the business of only 2.4 per cent during the half year, which Mr Wanless admitted was "inadequate". That return compared with more than 25 per cent from the core high street bank and dragged the group total down to 13.4 per cent, below NatWest's own 17.5 per cent target.

Even that increase would leave NatWest well behind its best performing rivals such as Lloyds TSB, which last week unveiled a sharp rise in its return on equity to over 40 per cent.

Mr Wanless insisted last week's reorganisation, which sees NatWest Markets predictable and highly profitable treasury operation taken back into the group, was not just a cosmetic exercise. "I'm confident now, with the new management in place, that they'll get the return up."

It was announced last week that Konrad "Chip" Kruger, an internal candidate, would lead NatWest Markets as chief executive. Mr Wanless refuted the accusation that Mr Kruger's appointment followed a failure to attract a heavyweight outsider to the position.

Questioned on possible acquisitions, Mr Wanless said it made strategic sense for NatWest to expand its interests in long-term savings and pensions by buying an insurance company. But he said current valuations made a deal unlikely.

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