Chief executive at NatWest Markets ousted

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The Independent Online
NatWest cast serious doubt on its investment banking ambitions yesterday when it issued a profits warning and ousted Martin Owen, the chief executive of NatWest Markets. The departure of Mr Owen with immediate effect signals a dramatic reversal of NatWest's previous strategy of attempting to grow the division into a top-10 global player capable of taking on American powerhouses such as Goldman Sachs and Morgan Stanley.

The unexpected announcement comes just weeks after it emerged that NatWest had initiated merger talks with Abbey National. That move, which would have further marginalised NatWest Markets within the enlarged group, has left industry watchers confused about the group's future direction. "What surprises me is that 12 or 18 months after they started pumping money into this area they should seem to be having second thoughts," one dealer said.

Derek Wanless, chief executive of NatWest Group, has taken on direct responsibility for NatWest Markets until a new chief executive can be found, although it is thought likely there will be calls for him also to take responsibility for recent failures. He said yesterday a review of the business had begun to speed up progress towards generating acceptable returns.

Mr Owen's abrupt departure follows the announcement earlier in the year that NatWest Markets had lost pounds 90m on its high-risk derivatives trading operation. It is thought an upcoming report into the debacle could be used as a opportunity for the bank to edge away from those volatile activities.

Like its high street rival Barclays, NatWest has come under strong pressure from its institutional investors to improve returns from investment banking, which lag behind industry benchmarks and its own retail banking division. Lloyds TSB, which has long steered clear of its rivals' investment banking ambitions, is estimated to make a return of 30 per cent on its shareholders funds - NatWest makes about 25 per cent from retail banking but only around 10 per cent from its investment bank.

Mr Wanless downplayed suggestions that he was sidelining investment banking, and said capital would be redeployed into "investment banking areas where better returns can be achieved". He paid tribute to Mr Owen but concluded that "it is important that we strengthen the senior management at NatWest Markets. It must have strong leadership and a clear strategy."

Mr Owen was NatWest's highest paid director last year, taking home a total of pounds 815,000, including a pounds 500,000 bonus. He waived pounds 200,000 of the bonus following the derivatives loss. Employed on a 12 month contract, Mr Owen is still negotiating the terms of his severance package.

Mr Owen, described as talkative and friendly, was thought an unlikely head of a global investment bank. Previous positions in a varied career have included three years at the Salvation Army and a spell as a financial regulator in the Isle of Man.

Mr Wanless confirmed recent fears for NatWest's profits yesterday when he said half-year profits at the bank would be significantly lower than for the same period last year, despite an improved performance from the rest of the group. Pre-tax profits for the six months to June are not expected to exceed pounds 770m, compared with some analysts' expectations for more than pounds 900m.

Brokers were yesterday taking the red pen to their forecasts for the full year, with estimates coming down by around 15 per cent to pounds 1,750m.

Investors have pushed for capital to be reallocated to high street banking, where high returns are coupled with much lower risk and volatility. The fear of greater competition on the high street pushed the shares of the whole sector lower yesterday.

NatWest's share price tumbled from a high of 819.5p early yesterday to a close of 755p, continuing the company's marked underperformance of its peers over the past year.

High street rival Abbey National fell 27.5p to 868p, Lloyds TSB slipped 15p to 626.5p and Barclays, under similar pressure to do something about the returns from its BZW investment banking arm, fell 36.5p to 1212.5p.

Mr Wanless said an independent inquiry into the losses earlier this year in its interest rate options business was nearing completion. He expected an announcement to be made before the end of the month, a month later than hoped.

The report, by City accountants Coopers & Lybrand and law firm Linklaters & Paines, has already been passed to the Bank of England and financial markets watchdog the Securities and Futures Authority.

It is not yet clear what action, if any, the regulators will take against NatWest Markets or any of the individuals responsible for the division where the interest rate option losses occurred.

Five managers have been suspended and millions of pounds in bonuses were clawed back after the problems came to light.

The investigation has already confirmed the cost of the mispricing of interest rate options at pounds 77m but Mr Wanless admitted that the affair had had a knock-on effect on the profits of the investment banking division as a whole.

One analyst said yesterday the resignation of Mr Owen, who had been the architect of NatWest's growth ambitions, marked the end of any pretence that the bank could take on the highly successful American banks, which have used the large profits from their massive domestic market to bankroll expansion abroad.

The analyst described the departure as a headhunters' charter and said he expected many of NatWest's best employees to leave.

Another problem facing the medium-sized UK investment banks in recent years has been the incursion of European players such as Deutsche Bank who have been prepared to accept the low returns on offer in British investment banking because of the even lower returns available on their domestic retail banking operations.

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