Interim results last week gave something of the flavour of the spate of corporate activity that is beginning to transform the company into the focused financial services group that chief executive Derek Wanless has long envisaged. Indeed, the headline figures were rendered rather redundant by the financial impact of the corporate deal-making in the half year that saw the acquisitions of Gartmore and in due course Greenwich Capital and the disposals of Bancorp, the stake in 3i and the pending sale of Banco NatWest Espana.
Once the relevant accounting provisions had been complied with the group registered an after-tax loss of pounds 111m. That, however, is something of an irrelevancy. It is more appropriate to look at the underlying profitability. Pre-tax profits from continuing businesses rose 23 per cent to $879m (pounds 565m).
It is those continuing businesses that provide a firm foundation on which NatWest can now build. Mr Wanless has made it clear that the group will be driven by three core divisions: retail banking, international private banking and investment banking. Since he took over as chief executive in 1992 much of his time has been spent streamlining the business to give it a focus, which was elusive when the empire sprawled so randomly.
Streamlining and focus can often be more polite words for savage cost cutting and rapid disposals. In NatWest's case, however, they can be taken at face value. Certainly there have been disposals but these have been matched by acquisitions notably in investment banking. Much has been made of the reduction of the retail branch network but this is part of an established programme. Again NatWest has done more than just close branches - it is also prepared to innovate. Witness the store concept that is being tested at Thurrock. Here the branch itself has no customers but instead offers an array of products and services that are on offer to allcomers.
The perception of NatWest is that it has been something of a laggard in terms of cost cutting. That is, perhaps, a little unfair, but at last the City believes there is a clear commitment to cost control which will yield benefits that some of its competitors have already reaped. Evidence that the process is well under way can be seen in the reduction, reported last week, of the cost/income ratio to 66.3 per cent from 70.1 per cent.
The figures were important not just because they give a clear flavour of the shape of things to come but also because they were accompanied by a pounds 450m share repurchase programme. The buy back was important because it gave a clear signal to the market that NatWest is prepared to return surplus capital to its shareholders where this can be justified. There had been doubts that the company would ever deliver on the promise that had been made in the past. Indeed, when NatWest purchased Gartmore, the fund management group, some argued that the money would have been better spent on a share buy back. That argument rather missed the point that the Gartmore investment was for the long term and will ultimately earn much greater returns. It also underestimated Mr Wanless' determination to deliver on his promises.
More importantly, the buy back, which could be afforded because of the strengthening capital base, does not preclude the company from making acquisitions particularly in savings and investments. It is no secret that Mr Wanless wants to expand here. However, the message is clear: capital will not be squandered in a way that might undermine the commitment to adding shareholder value.
The initial response of the shares to the interim results was negative - partly because it was thought that the buy back programme will tend to have a depressing influence over the next few weeks as it is digested by the market. However, in the latter part of the week there has been a sharp improvement. Even so, with an above-average yield and an undemanding p/e of around eight times next year's earnings there is little doubt that the shares do not fully reflect the transformation of the group or the potential that is vested in those changes. The period of weakness represents a clear buying opportunity.Reuse content