NatWest sets its sights on mutual life purchase

NatWest Group has set its sights on a life insurance mutual as the last big acquisition step in its expansion strategy. Fresh from Monday's purchase of Gartmore, the bank yesterday stressed its intention to bolster NatWest Life's shaky position in the long-term savings market.

Derek Wanless, group chief executive, said: "That market makes sense to us, we can see how it is developing - not just through sales through the branch network but by direct sales and sales through independent financial advisers."

NatWest yesterday reported a 10 per cent increase in 1995 pre-tax profits to pounds 1.75bn, and analysts said they were encouraged by a dividend slightly higher than forecast, strong growth in underlying profits and further control of costs. "The core UK business is looking good and the strategy is pretty clear. For the first time in a decade the NatWest management is demonstrably doing the right thing," said Richard Coleman, analyst at Merrill Lynch.

NatWest Markets, which handles the big corporate lending, announced a specific bad debt provision of pounds 101m, which is believed to be against its exposure to Eurotunnel.

The bank would not comment on the provision. NatWest is thought to have an exposure of around pounds 300m and is one of the agent banks leading the refinancing negotiations over the tunnel operator's debt, which amounts to more than pounds 8bn and is in interest payment standstill.

NatWest also announced a pounds 55m increase in its general provision. "If these two provisions are excluded, profits growth looks very strong," said Ian Poulter, analyst at Williams de Broe. Underlying profits last year grew by 9 per cent. Total dividends were increased by 17 per cent to 25.3p.

Across the group costs grew by less then 3 per cent in 1995 despite sharp increases in restructuring charges. Stripping these out, costs rose by just 1 per cent. This increase was almost all generated by building up the investment banking arm, NatWest Markets. Operating costs there were 17 per cent higher than in 1994, as the business hires aggressively to build up its corporate finance strength. At the UK retail bank, costs fell despite the pounds 55m restructuring charge. Some 4,400 jobs were cut last year and 190 branches closed - a trend which is expected to continue. The retail bank has set itself a target of reducing its cost/income ratio from the high to the low 60s by the end of the decade. "I don't think the consolidation in the industry is anything like over," said Lord Alexander, NatWest Group's chairman.

When the proceeds from the sale of its US commercial banking arm, Bancorp, come through in May, NatWest will have about pounds 2.5bn of spare cash. Nearly pounds 500m of that will go on buying Gartmore. The group has ruled out buying a large US investment bank or a UK building society, and is now concentrating on building up its London corporate finance by hiring.

NatWest Life's performance has fallen well short of expectations, but the group regards the huge market for long-term savings products - life, pensions and old- age care - as a priority. It is keen to acquire a mutual, but recognises the difficulty in trying to win one in a hostile way.

A sizeable mutual purchase could still leave surplus capital, and even after allowing for continuing restructuring costs NatWest is actively considering a share buyback. It has shareholders' consent to repurchase 100 million shares, worth over pounds 700m on current prices. "If we cannot find an economic use for the surplus capital we will return it to shareholders," Mr Wanless said. NatWest's shares closed yesterday up 10p at 684p.

Targets for acquisition showing estimated funds under management

Clerical Medical (owns 7.5% of NatWest Life) pounds 10bn

Scottish Amicable pounds 11bn

Friends Provident pounds 10bn

National Provident Institution pounds 7bn

Norwich Union pounds 30bn

Scottish Provident Institution pounds 5bn

Scottish Life pounds 4.5bn