Sir David Rowland, NatWest chairman, said yesterday that while the bank should not to be "seduced" away from its strategy of improving the performance of its core business, it could not ignore what was happening in the marketplace.
Lloyds, NatWest's high street rival, moved to plug its own weakness in life and pensions with the pounds 7bn takeover of Scottish Widows in June. "It would be advantageous if we could do something in that area of business," Sir David said.
NatWest also announced plans to invest pounds 100m in developing its personal computer and mobile phone-based banking as part of its drive into the electronic commerce market.
Derek Wanless, NatWest chief executive, highlighted the contrast between strong unit trust sales and the more pedestrian result for life insurance as indicating the main area where the group needs to expand.
"The industry is in a period of considerable change, and the requirement to deliver low-cost stakeholder pensions is another significant market development," he said. "We think we can do very well without any acquisitions, but we will continue to look and see if there is anything out there which makes sense for us." Mr Wanless added: "For the time being we see it as easier to find value in the UK than internationally."
Analysts said obvious takeover candidates in the quoted sector would be Norwich Union or Legal & General, which would both fulfil Mr Wanless's criteria of being low-cost providers with strong brand names. Mutual insurers Friends Provident and Equitable Life are also seen as likely to come on to the market in the next few years.
Natwest's pre-tax profits for the half year rose 18 per cent to pounds 1.14bn, ahead of City expectations, boosted by a 32 per cent jump in profits from Global Financial Markets thanks to a booming foreign exchange and interest- rate derivatives business. The City was less impressed by the rise in operating expenses, which were up 5 per cent to pounds 2.4bn, despite the group's commitment to achieve lower costs in 2000 than in 1997. Net interest income was also down from pounds 1.93bn to pounds 1.84bn.
Mr Wanless attributed the rise in costs in the half to continued investment in technology and the need to keep existing systems running until new ones are fully functioning.
He insisted that, over the full year, the commitment to freeze costs at last year's levels would easily be met.
The group is exactly halfway through its five-year retail transformation programme, which seeks to cut costs and improve customer service by moving processing out of Natwest's 1,700 branches into a handful of hi-tech processing centres aim providing "seamless" service to customers by Internet, phone and mobile phone, and ultimately by interactive television.
Total bad debt provisions rose by 31 per cent in the UK to pounds 105m from last year's very low level. NatWest's shares fell by 51p to 1,195p yesterday.
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