Earning nervous attention from the markets
Wednesday 22 February 1995
Beneath the headline figure, yesterday's results did not paint a particularly pretty picture. Before taking account of a sharp improvement in exceptional items and a halving of provisions, underlying trading profits fell by 10 per cent. Analysts had been expecting a grim cost/income ratio, but actually seeing it in black and white was clearly too much for most of them.
This may well have been an unfair reaction. Cost-cutting seems to be the be all and end all of management these days, but it is not possible to grow a business simply by whittling away at the cost base.
The banking environment in Britain has improved markedly, and NatWest, along with its competitors, has a lot more cash in its coffers that it is wondering what to do with. If you cannot expand in such a favourable climate, then when on earth should you? The problem for NatWest remains the generally negative view of the way it is handling this expansion. For all the pride expressed yesterday in the fact that the group had finally hit its target of a 17.5 per cent return on equity, this performance still lags behind that of the competition. Lloyds and more recently Barclays have achieved success by focusing on domestic retail banking. In its search for improved profitability, NatWest might be wise to follow suit.
By contrast, the bank appears set on seeking revenue growth through diversification, and particularly by building up its activities in investment banking and overseas. This is a high-risk strategy, as likely to backfire as succeed. As Warburg has recently shown, the pursuit of international diversification can be a sobering experience. Until time proves the strategy right, or costs are brought clearly under control, NatWest should not expect other than nervous attention from the markets.
Test of credibility for the Bank
The pronouncement by a governor of the US Federal Reserve Board that it was close to success in its battle against inflation, and should start thinking about cuts in interest rates to pre-empt the next recession, had remarkably little effect on US financial markets yesterday. This was because the speaker was Alan Blinder, one of two Clinton-appointed governors and an unreconstructed Keynesian. His views are as a consequence little guide to policy. The markets will instead place their bets after hearing Fed chairman Alan Greenspan when he testifies to Congress today and tomorrow.
However, Mr Blinder raised an interesting question, and one relevant to Britain where a similar monetary policy is being applied. If interest rate changes now are designed to affect the economy in two years' time, then he is right to say the time to talk about cutting rates is before the economy has started to show clear signs of slowing down.
The US economy is still expanding pretty fast, but some forecasters predict growth in 1995 will slow to 2.5 per cent after a 4.1 per cent rise in 1994. Mr Blinder's own view is that the risks are now finely balanced between inflation and recession in the US. He will vote against "overkill" on interest rates, he said.
The catch is that signs of the slowdown in the monthly US statistics are very preliminary. A central banker has to fear damaging his credibility if he peaks too early on interest rates. This is even truer in Britain. Here the evidence that growth is starting to slow is far more conclusive than in the US. The lead indicators point to a worrying slowdown. Unfortunately, the Bank of England's toughness on inflation is not going to be taken on trust by the financial markets or businesses.
After the calamitous end to the last anti-inflationary policy - the link to the mark through the ERM - the Bank still has a long way to go before it attains the Fed's level of credibility. As marketing specialists like to say, it takes minutes to destroy a brand image but 10 years to build one.
For this first cycle of pre-emptive interest rate policy, overkill will be essential. It is probably the case that until the Bank has a longer record of success, it will have to tip the economy back into recession before it convinces financial markets of its seriousness in conquering inflation.
Across the Atlantic, too, financial markets expect to see interest rates rise again before they start falling, whatever Mr Blinder's views. Forecasting economic growth is fraught with uncertainty. Central bankers are the people who are paid to steer on the side of caution.
Clouds won't leave Swiss Bank
If Swiss Bank Corporation thought it had heard the last of the row over "contracts for differences", it will have to think again. As our report opposite shows, the possibility of "criminal charges" cannot yet be ruled out.
Goaded into action by the Treasury and SG Warburg, Northern Electric's financial advisers, a battery of regulatory authorities now seems to be looking into the transactions.
Potentially the most worrying from Swiss Bank's point of view is the Department of Trade and Industry.
If there were to be a prosecution it would be the DTI that would mount it. Swiss Bank believes it is in the clear. It took top legal advice before embarking on the transactions, which it considers are covered by exemptions in the insider dealing legislation for corporate bidders.
Clearance was also sought and obtained from the Takeover Panel prior to the transactions. Swiss Bank was subsequently also cleared by the Stock Exchange.
So far the only public pronouncements on the affair have come from the Stock Exchange and the Securities and Investments Board. Meanwhile, squeezed between Swiss Bank's lawyers on the one hand and the Treasury's new get-tough policy on the other, the City's self-regulatory framework is having to work hard to prove itself.
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