American revolution is good for UK banks: Over-ambitious British lenders once poured billions down the drain in the US. Royal and NatWest now think smaller, writes Peter Rodgers

LARRY FISH, who runs Royal Bank of Scotland's US operations from Providence, Rhode Island, has a simple banking philosophy. He says: 'If you can't drive to it, don't lend to it. Nobody who lends money here has to get on an aeroplane to visit a customer.'

Boring and old fashioned perhaps, but it is the basis of a successful revolution in British banks' strategies in the US.

Over the past 15 years they have become notorious for pouring billions of dollars down the drain with over-ambitious American expansion plans that went wrong. You name the US disaster - lending to property, California vineyards, highly geared corporate buyouts, Latin America - and a British bank has been involved.

The roll call of dead and wounded is headed by Midland - which found a financial black hole in California 15 years ago - Barclays and NatWest. Hongkong & Shanghai, though not then a UK bank, also haemorrhaged money through its New York subsidiary.

Mr Fish, however, boasts: 'We are the only UK bank that has never lost a penny here.'

Royal began its move into the US by buying Citizens Financial of Providence, Rhode Island, in 1988. It was such a stodgy and conservative business that it had avoided the lending binge that led to the collapse of dozens of other New England banks, when the worst recession in the region's history hit shortly after.

Riding it out without a single loss-making quarter, Royal bought Old Colony in 1990 but waited two years before it hired Mr Fish, an American, and seriously began to expand Citizens, sometimes with knock-down acquisitions. Nearly half its nine buys were from the government, which took over many of New England's failed banks.

Royal had read the lessons of the past, and saw the folly of being too ambitious in a country where 11,000 banks are competing in a financial system that is surprisingly alien to British bankers.

John Tugwell, the Briton behind NatWest's recent recovery from heavy losses in the US, says that when he arrived in New York in 1990 the business had mistakenly expanded away from its steady local consumer and small firm customers towards property, leveraged buyouts and nationwide lending to mid-sized companies.

NatWest's modest bank in the North-east had become one of the biggest financiers of buyouts in the country. Mr Tugwell says: 'I found I was a major lender to the largest meatpacking plant in the US, in Kansas, but nobody from here had even been to it.'

At that time, the bank was valued by a New York investment bank at only dollars 500m ( pounds 328m) because of its orgy of bad lending, yet NatWest had already invested dollars 2.2bn. It was a choice between sorting out the business or quitting with a loss of dollars 1.7bn.

The bank decided to have a go. The same investment bank valued the US branch banking business at dollars 2bn at the end of last year.

The recovery strategy NatWest chose is interestingly similar to the expansion plans on which Royal embarked at much the same time, 150 miles to the North-east.

Both banks decided they were too small, so they went on a takeover trail. But they stuck to tightly defined areas.

NatWest has spent dollars 800m this year buying two up-market New Jersey banks, Citizens First Bancorp and Central Jersey Bancorp, moves that followed a steady flow of smaller deals.

The enlarged group's 330 branches are in New Jersey, the hub of the bank, Westchester County, Manhattan, Long Island and the boroughs of New York - not a big slice of the US, perhaps, but the size of England, and with a population of 27 million.

Royal's 166 branches cost dollars 925m (including dollars 440m for Citizens in 1988 and the dollars 140m purchase of Quincy Savings Bank, to be completed next year.) They are within 100 miles of Providence.

A second common strategy is that both make acquisitions repay their cost quickly by centralising expensive back-office functions. This means shutting down the cheque and other processing operations of banks taken over.

NatWest opens a new centralised processing centre next month in Scranton, New Jersey, where labour and taxes are much lower than in New York.

Royal's processing is done in Citizen's home base of Providence. Mr Fish says: 'If we can't make about 40 per cent cost savings by merging the back office we just don't make the acquisition.'

Another objective of both is to be top dog locally. This is easier than it sounds in the fragmented US market, dominated by small- town banks. For example Quincy, Royal's latest buy, has a third of the market in the town of that name in Massachussets: population 100,000. Mr Fish says: 'It is possible for one bank, though not a big one, to control the market where it is.'

Royal also has little reverence for local traditions. It will not buy a bank unless it can stamp the Citizens name on it. Old Stone, the oldest savings bank in America, and Boston Five Cents Savings Bank, whose first chairman was Benjamin Franklin, have both had their names changed to Citizens.

Where the two banks differ most is in NatWest's determination to move up-market and Royal's liking for steady, reliable blue-collar customers.

NatWest's two buys this year cover Bergen and Monmouth counties in New Jersey, which Mr Tugwell says are 'two of the most affluent areas' in the country. These are customers to whom NatWest wants to sell a lot more financial products.

Mr Fish says blue-collar workers have a strong affiliation to their banks and always pay debts. He believes rich customers shop around for insurance, broking, mutual funds and credit cards. Blue-collar workers are more likely to buy from their local bank.

These differences probably account for Royal paying no more than 1.9 times book value for its blue-collar banks while NatWest has been paying 2.4 times. Which strategy has greatest profit potential is as yet hard to judge.

Bob Speirs, Royal's finance director, says Citizens has already achieved the group's target of contributing 10 per cent of profits, with pounds 27m before tax in the latest half-year and a pre-tax return on capital of 15 per cent. There is to be a breather while Citizens digests all the minnows it has swallowed. There is City speculation Royal may sell off Citizens, but that seems unlikely given its success.

NatWest Bancorp, with approaching dollars 30bn of assets, is nearly three times the size. Having turned it round, Mr Tugwell says it would be illogical to sell it now.

The next step, after a breather like Royal, may be to buy similar banks further afield, though NatWest does not envisage a dramatic increase in the 13 per cent of its capital now in North America.

Remembering those past disasters, Mr Tugwell says: 'It will be somewhere we can travel to and from in a day - and definitely not California.'

(Photographs omitted)