NatWest chiefs under pressure as sale of investment banking arm leaves pounds 637m hole

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The position of NatWest's top management looked increasingly precarious last night after it emerged that the sale of large parts of NatWest Markets would leave a pounds 637m hole in the accounts this year. Lea Paterson examines the group's failure to become a main force in investment banking.

National Westminster Bank is to split the equities business of NatWest Markets, its investment banking arm, between Frankfurt-based Deutsche Morgan Grenfell (DMG) and the US Bankers' Trust in a pounds 179m deal.

The deal, which will leave NatWest nursing more than more pounds 600m in trading losses, provisions and other charges, dismayed the City and led to renewed doubts about the future of its chairman Lord Alexander and chief executive Derek Wanless.

Mr Wanlesssaid: "We have been unsuccessful in developing this business and have therefore taken the very tough decision to effect an orderly exit as being in the best interests of shareholders and NatWest as a whole."

DMG, the investment banking arm of Germany's Deutsche Bank, is to buy NatWest's Asian and US equity derivatives business for pounds 50m. Bankers' Trust, which snapped up NatWest's European cash equities for pounds 129m. NatWest is to retain "a proportion of its UK equity derivatives book", which will be wound down. "It's the bit that neither Bankers' nor DMG wanted," commented one insider.

Both DMG and Bankers' got a good deal, according to City analysts, who had previously put a price tag of between pounds 300m and pounds 400m on the two sets of businesses. One commented: "One had hoped NatWest might have done rather better with this sale".

Despite City criticism, Mr Wanless said he was pleased with the sale. He said: "The fact that we have achieved more than net asset value is good. We are satisfied with the price". NatWest achieved a surplus of pounds 55m over net asset value for the businesses, but analysts pointed out that this was before a goodwill adjustment of pounds 65m. One commented: "There is a lot of accounting flexibility in these things".

Last month, Barclays sold parts of BZW, its investment banking arm, for pounds 50m less than book value.

NatWest expects its investment banking activities to lose pounds 637m in the year to December, it was revealed yesterday. NatWest Markets is predicted to make an operating loss of pounds 210m, and NatWest is also set to take a pounds 270m restructuring charge. In addition, the group has made a pounds 77m provision for options mispricing discovered last March and an pounds 80 post-Budget adjustment to finance lease receivables. John Leonard, banking analyst at Salomon Brothers said: "The disappointing element [of the announcement] is the large loss and the size of restructuring charge".

Mr Wanless attributed the poor performance of NatWest Markets to two factors, its high cost base and the uncertainty surrounding the future of investment banking at NatWest. He emphasised that the losses did not, in the main, stem from positions taken by NatWest's traders. But Chip Kruger, chief executive of NatWest Markets admitted: "That is not to say that individual trades didn't lose money in October and November."

The City was highly critical yesterday of the way in which NatWest Markets has been managed in recent months. One analyst called NatWest's failure to set out a clear investment banking strategy "a major disaster". Another said that it raised questions over the future of both Mr Wanless and Lord Alexander, NatWest's chairman. One commented: "I would not be surprised to see them go, but management tend to cling on as long as they can in these situations".

Mr Wanless yesterday said he was "committed" to the remainder of the businesses within NatWest Markets. But some analysts doubt ed whether NatWest's substantial corporate advisory business could survive without its equity operations.

One said: "They've started unravelling the business and it's difficult to see where it's going to stop."

NatWest also announced yesterday that its US cash equities division is to close. The bank has also had "a number of approaches regarding its Australian investment banking operations", and is "in discussions" about the sale of its Asia cash equities businesses.

Outlook, page 25