NatWest Group yesterday sold out of commercial banking in America and hinted that it may pass on some of the pounds 2.2bn proceeds to its shareholders. Bancorp, NatWest's New Jersey-based retail operation, has been sold to the acquisitive American group, Fleet Financial Corp.
But a significant share buyback looks less likely than deploying NatWest's surplus capital to build up its investment banking operations on both sides of the Atlantic and its UK retail position.
"Clearly after the Bancorp sale we are more than adequately capitalised, and the group is generating capital rapidly, so we do have the opportunity to make acquisitions across a range of businesses," said Derek Wanless, NatWest's chief executive.
Bancorp's sale took advantage of a wave of consolidation in US retail banking, which has seen deals worth around $43bn. A relaxation of the rules preventing link-ups between state banks, and the need to cut costs, has already prompted nine mergers or acquisitions this year. But the sale of Bancorp proved more difficult than expected and netted well less than the $4bn price tag originally publicised by Goldman Sachs, NatWest's advisers.
The terms of the deal call for a cash payment of $2.6bn, plus a deferred consideration of $560m. This involves annual payments equal to about 50 per cent Bancorp's earnings as part of Fleet Financial over a maximum period of eight years. There are also assets excluded from the sale worth $400m, comprising a loan portfolio and the New York headquarters of NatWest Markets. The tax on the sale is not meant to be material, NatWest said.
Stewart Young of Charterhouse Tilney said the price was at the bottom end of expectations but that the market is relieved that a disposal has been achieved. NatWest shares closed yesterday up 19.5p at 649p, but analysts expected a drop today as the strong dilution effect on earnings per share is appreciated.
While saying it is reviewing a number of ways of using the proceeds from the Bancorp sale, including returning capital to shareholders, NatWest set out its strategic priorities as developing its retail banking position in the UK, reinforcing NatWest Markets' global presence, notably in London and New York, and building up international private banking via Coutts.
NatWest is keen to acquire a fund management group in London and bolster its corporate finance capabilities in the City and New York. NatWest recently bought Gleacher & Co, a private M&A firm New York. But Mr Wanless said NatWest had "no plans to acquire a major US investment bank".
"We are keen to build up NatWest UK's strong position. We intend to get our cost/income ratio down by 10 per cent by the end of the decade and that clearly is going to require change and investment. The whole life and long-term savings markets are very attractive," Mr Wanless said.
Having turned around the loss on what has been a spectacularly costly investment, the decision to put Bancorp, with its 300 branches, up for sale marks a radical shift in NatWest's strategic thinking.
It had been considering strengthening the operation, but with the stakes raised by the frenzied pace of consolidation, NatWest decided it had little option but to get out altogether. "Bancorp could not maintain its competitive position long-term without further substantial investment. We do not believe such investment would yield acceptable returns," said Lord Alexander, NatWest's chairman.
Fleet, a bank holding company, is the 10th-largest bank in the US, with a market capitalisation of $10bn.
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