Royal Bank in talks to merge American unit

JOHN EISENHAMMER

Financial Editor

The Royal Bank of Scotland announced yesterday it is in talks to merge its subsidiary, Citizens Financial Group, with the Bank of Ireland's First New Hampshire Bank, joining the consolidation wave in the US.

Iain Robertson, managing director of Royal Bank's corporate and institutional banking division, said the deal made sense as the Royal Bank subsidiary and First New Hampshire Bank were both "essentially community neighbourhood banks" and generally the leading or second bank in their respective markets.

Full-year results posted yesterday warmed the City, with a 13 percent rise in pre-tax profits to pounds 602m topping expectations. "The results were helped by lower bad-debt provisions, nonetheless it's a very good increase at the pre-provision level and I don't think anyone will be able to fault that," said Panmure Gordon analyst Tim Clarke. Royal Bank's shares closed yesterday up 10p at 557p.

The announcement on Citizen did not make clear which subsidiary is the driving force behind the merger. "It looks like a continuation of what Citizens have been doing for a long time - making acquisitions - which has been very profitable for them so far," said Mr Clarke.

The Bank of Ireland said a further announcement would be made when discussions were concluded. The Royal Bank, which has itself been the subject of recent bid speculation as the UK banking and building society sector makes a dash for size, appears to be adopting the opposite strategy from NatWest Group, which is selling its US retail arm, Bancorp. NatWest concluded there is no point in being a small player in a big market and did not wish to commit the resources to build-up.

Net interest income at Royal Bank increased by 11 per cent, or pounds 107m, of which 4 per cent was attributable to acquisitions made by Citizens. Royal Bank said it also saw good volume growth in mortgages and corporate advances. Operating expenses, as expected, were sharply higher, showing growth of 10 percent.

Royal Bank said these were associated with Citizens and with expansion at its Direct Line Insurance unit and in the domestic branch network. Even then, its cost-to-income ratio improved to 52.2 percent from 53.2 percent. The dividend was increased to 16.2p against 13.75p.

Royal Bank said Direct Line's performance was particularly pleasing given the highly competitive market. It showed deteriorating operating margins but reported roughly stable profits from motor and household insurance at pounds 112m, up from pounds 110m.

Lord Younger, Royal Bank's chairman, accompanied the results with a guarded call for an interest rate cut. "Some easing of the monetary stance may be appropriate," he said.