The banker who's not for turning

Profile: Derek Wanless: The NatWest chief is holding firm to his strategy, writes Nick Gilbert

It is impossible not to like Derek Wanless. A father of five, his abilities have propelled him from humble beginnings on Tyneside to the chief executive's office at National Westminster Bank via scholarships at Newcastle's top-notch Royal Grammar School and Kings College, Cambridge, where he got a first class maths degree.

"Derek's easy going, very pleasant, a brilliant chess player, yet he enjoys the simple pleasures of life," says Ian Farnsworth, a former colleague at NatWest. "He prefers watching Newcastle United to going to the opera."

Indeed Mr Wanless is a fanatical member of the Toon Army of United supporters. He has a standing invitation to join the board of the recently floated football club, but he has so far declined, citing business commitments and the fact that NatWest Markets sponsored the Newcastle float.

In all, Wanless is a very modern boss. His arrival at the top in British financial services was on merit, not via some dynastic privilege. In his five years as chief executive he has won respect and loyalty from his lieutenants, not through fear but through a sharp intellect and genial style that makes him more approachable than most bosses of pounds 13bn enterprises in a sector not known for consensus-building.

Still, Derek Wanless is under distinct and growing pressure. While his intelligence and managerial abilities are so far not in question, some of his strategy for NatWest is. This week saw the latest episode of the continuing difficulties of NatWest Markets, the investment banking subsidiary that has been aggressively built up by Wanless, but which has not delivered the results, particularly after it was revealed that the division lost pounds 90m on options trading. Markets has become - as one analyst put it last week - "the thorn in the side" of the bank, and the departure of Martin Owen may be just one of several casualties.

This has inevitably led to questions about the future of Wanless himself. Such talk is premature, but his record is under scrutiny, and no respectability and geniality will save his job unless he can prove that the strategy of building a large investment bank from scratch is a good long-term play.

Under Wanless, NatWest shares have barely doubled at a time of soaring stock markets. In the same five years shares in Lloyds, concentrating on unglamorous High Street banking (including the TSB merger) have risen more than four times. Lloyds bought a life insurer and a mortgage business before it was fashionable.

But NatWest was stood up on its first date when it tried to court Abbey National, a deal which - if consummated - would have been a marriage of virtual equals because of the relative strength of their shares. This would have been unbelievable 10 years ago. One leading City figure who knows Wanless and his Lloyds TSB counterpart Brian Pitman reckons Pitman is a single-minded, keep-it-simple, bruiser. Wanless may be a bit too bright, losing focus as he sees too many sides of a question.

Consider what Wanless says about NatWest Markets. "It is much stronger in its underlying components than it was four years ago." Yet four years ago the investment bank made pounds 440m before tax. Last year after spending hundreds of millions on acquisitions, NatWest Markets made pounds 462m. This year it is likely to make a lot less.

Wanless is now conducting a review of NatWest Markets and seeking a new chief executive. "We are pleased to see he has decided on a full operational review and we look forward to the outcome," says Graham Wood, an investment manager at Standard Life, one of NatWest's leading institutional shareholders.

Yet Wanless could disappoint those expecting dramatic change. He may cut out activities like unprofitable lending to major companies, but he insists NatWest Markets is still an essential part of the group. "Any idea of a U-turn is completely wrong," says Wanless. "So is selling the business. It is not on our agenda."

If it was, Wanless himself would be under mounting pressure to quit. A sale or cutback, even a demerger, would amount to an admission that the strategy for creating a strong, profitable investment bank had failed. He would not be quite alone at the top; Lord Alexander, the NatWest chairman, is also exposed. Perhaps with this in mind, Lord Alexander has written to the bank's top 10 institutional shareholders offering to meet and reassure them that the bosses know what they're doing.

Wanless himself soldiers on. He is hardly alone in struggling; BZW, the investment banking offshoot of Barclays, makes even less money than NatWest Markets, and may yet face the same catharsis as NatWest in the near future as the patience of the Barclays board and the company's institutional shareholders runs short.

The logic of trying to create an investment banking business is appealing, since there is little profit in run-of-the-mill lending to companies. Much better, surely, to offer companies financial products that might allow them more flexibility and commercial advantage, and make a better return at the same time?

Wanless and Owen must have thought that if anyone could pull it off, they could.The black arts of managing risk and stress-testing complex derivative positions are way beyond the skills of the branch manager in Wolverhampton, but not too hard for a maths genius, or a man like Owen with a doctorate in risk management from the University of California.

But it is worth remembering that complex financial products, the stock of an investment bank, require in many cases large amounts of capital to be risked at any one moment. The headline profit margins are greater on these things than on straight lending, but such calculations ignore the potential cost of risking, say, pounds 500m of the bank's capital on a big, profitable trade that could go pear-shaped.

The other criticism of Wanless is that he is building an investment bank the hard way. ING and Swiss Bank Corporation, which bought Barings and Warburg respectively, at least acquired entire investment banks and did so cheaply.

But Wanless disagrees. "The broad strategy has been to redeploy capital that was tied up overseas in our retail operations and in things like global custody where we didn't think we could win. This has been reinvested in rebuilding technology and improving the delivery of services in retail UK banking and in developing NatWest Markets." He is referring to NatWest Bancorp, the US retail US bank sold to Fleet Financial for around pounds 2bn.

In the last 18 months NatWest has spent pounds 1bn on acquisitions. About half was spent in the US on buying the Gleacher mergers and acquisitions business and Greenwich Capital fixed income specialists. The balance went nearer home buying the Gartmore fund management group and Hambro Magan corporate finance house.

"We regard the acquisitions as essential and we're not going back on them," says Wanless. "Our target return on equity for the whole group is 17.5 per cent and NatWest Markets should be making that as well."

One of the unpleasant ironies facing Wanless is that the old cliche of changing a bank into a financial supermarket has been turned on its head. Sainsbury's, Tesco and Safeway are all now offering financial services in alliance with high-street banks.

It's no fun being a top commercial banker in the last years of the 20th century. Wanless had his chance but ended NatWest's financial services link with Tesco in February. Tesco has now gone into business with Royal Bank of Scotland, an episode that led to some boardroom ructions at NatWest.

Even if Wanless now has the full support of his board, his strategy is testing the patience of NatWest's owners.

"We said in 1993 that the transition would take about seven years, and that looks about right," he says.