Jeremy Warner's Outlook: Hold the acquisitions as Sir Fred goes organic

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The Independent Online

It's not easy to think of banking as a growth business; most people would imagine the big bad banks as dinosaurs, their profits made fat only by the inertia of their customers and the apparently cosy cartel they seem to operate. However, that's not what yesterday's numbers from Royal Bank of Scotland Group would suggest. Organic growth in revenues at RBS last year was an astonishing 11 per cent, the sort of top line increase that many chief executives would kill for.

Yet this is not some tearaway new entrant; it's Britain's biggest bank in terms of UK market share. And whereas most of this growth came from corporate banking, capital markets, insurance, mortgages and consumer credit, even staid old retail banking managed to achieve respectable growth of 3 per cent.

For how much longer can RBS continue to grow like that? Quite a bit longer yet was the message yesterday from Sir Fred Goodwin, the chief executive, who for the time being vows to eschew the temptations of further international acquisition, making so as to bed in the purchases he has already made and concentrate on organic growth. Even Asia, everyone's favourite hunting ground, doesn't interest him with prices as high as they are. Expansion in Asia is more likely to be via joint ventures than acquisition.

This is undoubtedly the right approach. RBS's acquisition of Charter One in the US last year, together with the implication of more acquisitions to come so as to make RBS into one of the biggest interstate banks in America, was not universally well-received. Sir Fred needs to demonstrate that he can achieve results with what he has already got in the US before he goes any further.

Stung by criticism that he's empire building to the possible disadvantage of shareholder value, Sir Fred was at pains to point out yesterday that RBS's acquisition-making is not as rapid fire as it seems relative to peers. HSBC, for instance, has bought twice as much over the past five years as RBS, which is only sixth among banks in the league table of international acquirers.

For the time being there is in any case already quite enough to keep him occupied. Sir Fred expects to generate some further surplus capital this year, but what with the amount he's committing to organic growth, there won't be much left for share buy-backs. So he was always likely to be constrained in his ability to make further acquisitions anyway. Steady as she goes seems to be the order of the day. Is there anything out there likely to interrupt this happy state of affairs?

Lots of people would just love to see Sir Fred slip on a banana skin. Success and celebrity has a habit of doing that to you, but there's little sign of him taking a tumble. Sir Fred remains a restless and driven soul, and though detractors speak of an autocratic and imperious style of management, it's hard to argue with the results. As long as the economy in Britain and the US holds good, RBS's performance should continue to defy the sceptics.

Centrica pricing

Sir Roy Gardner, the chief executive of Centrica, took a big gamble when he jacked up his domestic gas and electricity charges, and, well, it sort of half paid off. Profits and margins at Centrica's British Gas offshoot are back to where they were before they were crippled by the rising costs of wholesale gas and electricity, but only at a considerable cost to the size of the customer base. More than 1 million households jumped ship in the aftermath of the price rises, reducing Centrica's share of the domestic gas market from 62 per cent to 57 per cent and electricity from 24 per cent to 23 per cent.

The recovery in margin produced a 64 per cent surge in operating profits. This was roundly condemned by consumer groups and unions yesterday as profiteering, even though it is hard to see how the 3p in the pound of operating profit British Gas is now generating on its sales can reasonably be described as excessive. Centrica has to be allowed to make some money if it is to safeguard the nation's gas supply.

Pricing is nonetheless a real conundrum for British Gas. The moment they had lured British Gas's deserting customers into the fold, rivals jacked up their charges as well, for no one could make money with the previous mismatch between wholesale and retail prices. The savings to British Gas customers from switching would have been marginal. Yet because Centrica is the incumbent, it must always lead on price, and in attempting to claw back margin, be prepared to lose market share. Smaller rivals wouldn't dare.

Centrica claims to have stemmed the outflow of customers in recent months with savvier pricing packages. It is also attempting to hedge its exposure to wholesale prices by acquiring its own sources of supply. Even so, it may have to cede more ground still before before reaching equilibrium.

Bribing the workers

The minimum wage is that rare thing - a government policy that has actually worked. Notwithstanding the dire warnings of the CBI, it has succeeded exactly as it was supposed to in lifting millions out of poverty without, on the available evidence, damaging employment prospects. But you can always have too much of a good thing, and the relentless rise in the minimum wage at rates well above the general level of wages may now indeed be starting to damage competitiveness and jobs, particularly as it is small business which is most affected. Today the Prime Minister is expected to promise to raise it again, this time by an inflation-busting 9.3 per cent to £5.30 an hour, bringing to nearly 50 per cent the amount by which the minimum wage has risen since it was introduced.

Of course, he'll be able to say that this is on the recommendation of the Low Pay Commission, but who's he kidding? As pre-election bribes go, they don't come much more blatant than this. Why bribe someone with their own money through tax cuts when you can do it with someone else's? Some 1.7 million workers will benefit from today's announcement. That's an awful lot of votes.

Challenge of the net

There won't be much sign of the destruction of corporate profitability the internet was meant to bring about in today's annual results from WPP, the advertising giant. Sir Martin Sorrell, the chief executive, will, I'm quite certain, have ensured that profits are comfortably ahead of market expectations.

As our news analysis on page 40 points out, corporate profitability more or less everywhere is booming as never before. The old economy, it seems, has proved a good deal more resilient to the power of the internet than the high priests of the new medium foresaw. WPP and others that were supposed to have been disintermediated by the net have survived unscathed.

Still, old theories die hard and it is remarkable how in an echo of the boom it is now Google, MSNSearch and the miracle of broadband which is meant to be finishing off WPP and its like. There will be little sign of this in today's results. To the contrary, internet marketing is one of the strongest-growing areas of WPP's business, proving yet again that to the accomplished advertising man, a new medium is never a threat but always an opportunity.

That said, broadband and search engines plainly do have the capacity to inflict quite serious damage on established forms of advertising, for they compete for the customer's time and attention. They also allow him to get rid of the advertiser altogether if that's what he wants. Yet in every cloud there's a silver lining. You may not need an eye-catching or entertaining ad to sell something across the internet but you certainly need to know how it's done. As companies move from established forms of marketing to internet-based selling, the potential for rounded marketing companies like WPP is almost unlimited. For instance, in pharmaceuticals direct selling to the medical profession through salesforces is being progressively replaced with internet-based marketing techniques, requiring clever design and accessible explanation. The agencies are replacing the salesmen. No wonder Sir Martin doesn't regard Google as a threat.