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Banking on a future
Sunday Herald, The, Oct 3, 1999 by Ian Fraser
This week the Bank of Scotland will let investors know the details of its NatWest bid. Ian Fraser examines the fine print A DIRTY war has broken out for the heart and soul of British banking following the Bank of Scotland's #21 billion dawn raid on National Westminster Bank. The Bank of Scotland, whose top executives claimed last night to have received a "solid response" following a tour of NatWest's London-based institutional shareholders last week, has kicked off a process of consolidation which analysts believe will change the face of British banking forever.
Once the 'rough wooing' is over, there may be as few as three bank brands in the UK market. The grandiose Victorian and Edwardian banking halls that once graced high streets up and down the land will be a distant memory.
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If the Bank of Scotland gets its prey, many bank branches will be shrunk and transformed into what it terms "banks in a box" - scaled down outlets that could nestle in the ground floor of a large office building or among the chain stores in an out-of-town shopping mall.
"These outlets will include automatic teller machines (ATMs) that offer more functionality. There will also be room for one or two members of staff," said Gavin Masterton, chief operating officer of Bank of Scotland. "We expect to be piloting one of these in Scotland within the next week or two."
He believes these outlets, which will be cheaper to run than traditional bank branches, will enable BoS to increase the number of branches operated by NatWest, should its contested takeover attempt succeed.
The Bank of Scotland's bid, which depends on shareholders accepting that its management can do a better job of running NatWest than the incumbent team, values NatWest at #21 billion and now stands at a 10% discount to the market value of its prey. This means a counter-bidder is almost certain to emerge. "This is a once in a lifetime opportunity," said Robert Mackenzie, banking analyst at WestLB Panmure.
So high street banks were last week weighing up their options, while City pundits took delight in speculating on who would make the next move. "After Friday's bombshell it has become a waiting game," said one City source.
As the claim and counter-claim grew wilder and wilder, only one thing was certain. Within a matter of months, both NatWest and Legal and General - whose own merger with NatWest has been scuppered by Bank of Scotland chief executive Peter Burt's stinging attack on 'bancassurance' last week - will have new owners.
The traditional high street banks have steadily lost market share since the 1980s, notably to the building societies, but they will see their position eroded even faster in the digital era. New entrants can offer attractive products - such as cheaper mortgages and deposit accounts with higher interest rates - through the use of cheap delivery channels like the internet.
If traditional banks can't find ways of cutting their costs, their products will become increasingly unsaleable. However, the banks have an ace up their sleeves: consumer inertia.
British account holders are more likely swap their spouse than shift their bank accounts - which explains why the Bank of Scotland is prepared to stump up over #21 billion to get its hands on NatWest's six million personal customers (16% of the UK market) and its one-quarter share of the corporate market.
David Erskine, investment director at Standard Life, said: "If they succeed at this price it would be very good news for Bank of Scotland." It seems any residual differences between Standard Life and the Bank, which arose after the mutual life insurer's surprise decision to off-load its 32.2% stake in BoS in 1996, have now been erased. "We have no hard feelings and still have a 1.9% stake in BoS. If their deal stacks up we will certainly support it," remarked Erskine.
Erskine confirmed Bank of Scotland's senior executives will be presenting their full proposals in a "one-to-one" meeting with Standard Life early this week. The BoS roadshow will also visit a string of other Scottish based institutional shareholders with equity in NatWest. Peter Burt earlier said he was delighted that Standard Life is lending its support to his bank's bid for NatWest. "That gives me particular pleasure," he said.
The joker in the pack is the Bank of Scotland's Edinburgh neighbour, Royal Bank of Scotland. But analysts are beginning to question whether RBS has the stomach to launch a counter bid.
Despite the drama of Sir George Mathewson's abrupt return from Washington last Friday and the appointment of Goldman Sachs and Merrill Lynch as its advisers, the Royal Bank decided to closely examine its armoury before throwing its hat in the ring. The US merchant bank Goldman Sachs had been eager for an early move, but Sir George returned to Edinburgh to watch the South Africans play Scotland at Murrayfield today. It also appears Sir George's attempts to persuade the NatWest board that the Royal Bank is a suitable 'white knight' have fallen on deaf ears. The board has indicated it would prefer to mount a standalone defence.
