Cash bonanza at Royal Bank of Scotland

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The Independent Online

Royal Bank of Scotland yesterday signalled it would hand back cash to shareholders if it decided not to make any major acquisitions this year.

Unveiling record profits of £6.1bn for 2003, Fred Goodwin, the chief executive, stressed that he would not make acquisitions unless they fit the bank's criteria, which include being able to generate a 12 per cent after-tax return.

"There is this sense that you have to play to the gallery by making acquisitions to keep people interested. If we do not find acquisitions, we will have no qualms in returning capital to shareholders," Mr Goodwin said.

RBS, which has been Britain's most acquisitive bank in the past few years, is under the spotlight over its future strategy because it will begin to generate about £2.5bn annually, from this year, now that it has completed its payments for NatWest.

RBS bought its smaller rival in an all-share deal in 2000 for £21bn and has repaid shareholders in a series of tranches, completed last year.

RBS spent £2.7bn on a wide range of acquisitions in 2003, including the Churchill Insurance business in the UK and Commonwealth in the US, adding to its fast-growing American business, Citizens.

Mr Goodwin said he saw "nothing mainstream" in the UK as a future target, due to the likelihood that further major banking deals would be blocked by the Competition Commission. RBS has, however, been talking to internet bank Egg about a possible deal.

RBS last year saw corporate and wholesale banking make the largest contribution to its profits, at 36 per cent. The sector returned £182m in income, up 42 per cent on 2002.

RBS relies less on its retail banking than most of its major rivals, with personal customers accounting for 27 per cent of profits. The insurance business, having been beefed up by Churchill, generated 16 per cent of profits and RBS's overseas arm accounted for 21 per cent. Overall, RBS's profits rose 29 per cent in the 12 months to 31 December.

Mr Goodwin struck a bullish note about the robustness of the British consumer, in comparison with his opposite number at Barclays, Matt Barrett.

"Much of the current debate is informed by the fact that personal lending is at very high levels. But, as the economic circumstances are as benign as I can remember, I would be surprised if it were not at a very high level," Mr Goodwin said.

RBS's shares jumping 95p to £17.30 on the results. Martin Cross at Teather & Greenwood said: "Revenue growth of 14 per cent is the strongest we shall see this results season. It is affected by serial acquisitions, but underlying revenue growth of 10 per cent is self-evidently also robust."

Mark Thomas at Fox-Pitt Kelton highlighted that RBS, whose income has accelerated in the past few years, experienced a narrowing of the "jaws" between revenue and costs in the second half.

Mr Goodwin said RBS's performance was partly down to superior efficiency: "If we were as inefficient as Barclays, profit would have been £1bn less."

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