The departure of Martin Owen as chief executive of NatWest Markets is being widely seen in the City as the start of a phased withdrawal from investment banking so that its capital can be reallocated to more profitable retail banking. NatWest made 20 per cent plus on retail banking last year; on investment banking the return was barely more than the cost of capital at 12 per cent. Compare that with the 30 per cent return that Lloyds TSB makes, having shunned investment banking entirely over the years, and the attractions of retail over investment banking become obvious.
However, if that is what NatWest is really doing, it would mark a U-turn in strategy of such dramatic proportions that it shouldn't be just Mr Owen who is walking the plank, but Derek Wanless, his friend and mentor, and possibly Lord Alexander, chairman, too. NatWest has invested more than pounds 1bn in bolt-on acquisitions to the investment banking side over the past 18 months, buying Gleacher and Greenwich in the US and Gartmore and Hambro Magan in the UK.
For NatWest to put all that into reverse so soon after announcing that it aimed to become one of the world's leading global players in investment banking would indicate a confusion, lack of direction and loss of confidence at the top of a very alarming kind. So it should not come as any surprise to find NatWest insisting that this is not what is happening here at all. Actually it is the realisation that Mr Owen is the wrong man for the job and a recognition of the need for root- and-branch reappraisal of where capital is being used to best effect, the bank says.
There is, however, usually something to be said for the stock market's knee-jerk reaction to and interpretation of events, and there may be in this case too. Plainly NatWest needs at least to rearticulate and re-explain what it is trying to do with both the retail and the investment banking businesses. If it ever had global pretensions in investment banking, it is now obvious that these were over-ambitious. Shareholders need reassuring that there is an achievable and realistic strategy in place for NatWest Markets, which will eventually yield a reasonable return.
Just as the options debacle has focused attention on NatWest's lack of money-making clarity in investment banking, the failed talks with Abbey National have highlighted the group's uncomfortable position as a middle- ranking player in retail financial services. There, too, NatWest needs to redefine its ambitions and place in the market.
All businesses need time to reap the rewards of long-term strategies, and it is worth recalling that until the options fiasco, the general view in the City and the press was that NatWest wasn't doing too badly. Perceptions have now turned quite markedly, however, and doubts that were always there just beneath the surface have now surfaced with a vengence. If NatWest fails to address these concerns pronto, it could find someone else doing it instead.
Chancellor should think hard on dividend credits
An emergency package to introduce the windfall tax and welfare-to-work measures was how next month's Budget was originally billed. But that was before the landslide, and the indications are that Gordon Brown has steadily expanded his Budget ambitions. Whatever we get on 2 July, it will have to satisfy the Chancellor's taste for drama and headlines.
The latest suggestion is the abolition of dividend tax credits. This is an idea that has been kicking around for a long time and holds obvious attractions to New Labour as a revenue-raising device because the UK company sector appears to have a higher dividend payout ratio than business in most other developed countries. Reducing the tax incentives to pay high dividends will in theory boost retained earnings and investment.
As a part of a larger reform of corporation tax, this would be a sensible move. But there are two objections to the plan as leaked. The first is that corporate tax reform ought to be the subject of wide consultation by the Government, rather than being rushed in via an emergency Budget. The second is that it will in practise hit companies' cash flow because they are likely either to have to make higher contributions to their pension funds or raise cash dividends to compensate big investors for the loss of the tax credit. A Government that is pro-business and pro-investment would return the pounds 5bn proceeds by reducing the mainstream corporation tax rate.
Mr Brown appears to be casting around for the least painful way to increase the tax burden, and settling on the complicated issue of dividend taxation is a soft target. Leaking the news out early will have helped ensure the market reaction occurs safely before Budget day.
The bottom line in all this, of course, is that the country is not paying enough tax to finance all the Government spending we want, especially on health and education. With the election out of the way and a winter of crisis in the public services looming thanks to inherited spending plans, the Government does need to start talking about tax increases alongside its ambitions for welfare reform, high growth and employment. But it should not be rushing in to a mish-mash of tax changes like the abolition of the dividend tax credit without the kind of pre-Budget debate it promised in opposition.
British Energy decommissions its c.e.
Dr Robert Hawley, chief executive of the nuclear power generator British Energy, has been unexpectedly decommissioned five years before the end of his working life. His decision yesterday to part company with the group at the age of 60 was put down to it needing to lower the "age profile" of the board. The reality was that Dr Hawley asked for the chairman's job and was refused it.
Perhaps that was a wise move on the part of the board. Dr Hawley may be good at running pressurised water reactors but chairing a business as politically sensitive as nuclear generation requires skills of diplomacy and tact not always shown in abundance when dealing with Whitehall and Westminster in preparation for flotation.
His departure means that the two architects of nuclear privatisation are no more, John Collier, the former chairman, having died of cancer before the flotation. While a replacement for Dr Hawley is sought, a former pharmaceuticals executive, John Robb, will run the show. But since British Energy will never build a nuclear reactor again does anyone really care?Reuse content