RBS directors fear early exit by Sir Fred

Success turns to frustration for chief executive

Sources close to the board of Royal Bank of Scotland say they fear its chief executive, Sir Fred Goodwin, is about to quit.

The banker, 47, is understood to be unhappy about the company's relationship with investors and the low rating that Britain's second-largest bank has on the stock market.

Sir Fred believes that the cheapness of RBS shares has led the group to miss opportunities to expand abroad. He was particularly riled about investors' reaction to a proposed deal earlier this year to spend $1bn (£570m) to take a 10 per cent stake in Bank of China. The investment had to be scaled back to 5 per cent.

City analysts have talked openly about their unhappiness with Sir Fred, saying there is a "Sir Fred discount" in the share price.

One, James Eden of Dresdner Kleinwort Wasserstein, accused Sir Fred of megalomania at an open meeting in August.

RBS shares, which closed on Friday at 1683p, are at the same price they were in early 2001. Over the past five years, the group's profits have more than doubled, while its total assets have nearly doubled.

Sir Fred was fêted after the purchase of NatWest in 1999, which is cited as a textbook takeover of a bank. However, subsequent deals, such as the purchase of the insurer Churchill and US bank Charter One, have not been well received.

RBS was angered earlier this month when Santander, the Spanish bank where RBS had a cross-holding and directors on the board until last year, took a 20 per cent stake in Sovereign Bancorp, a US regional bank, with an option to buy the whole bank. Sovereign has long been an RBS target, and the two held takeover talks last year. But his board has now told Sir Fred that no major acquisitions can be considered in the near future.

The chairman of RBS, Sir George Matthewson, is believed to have floated the idea of demerging the bank's US business in an attempt to show the City how much it undervalues the company. However, Sir Fred and most of the board are opposed to this option.

The chairman is understood to be aware of Sir Fred's feelings and has counselled him against leaving, not least because of the state of the RBS board.

Sir George is due to retire next year, to be replaced by Sir Tom McKillop, the outgoing chief executive of AstraZeneca. Fred Watt, the finance director, resigned in the summer and has yet to be replaced.

However, it is believed that the board has started to look for a potential internal replacement for Sir Fred should he want to go.

One name mentioned is Cormac McCarthy, who has been chief executive of the group's Irish arm, Ulster Bank, since 2004.

An RBS spokeswoman denied that Sir Fred had held any discussions with the bank's board about his departure.

But a source close to the board said that senior directors were well aware of Sir Fred's personal feelings.

"The debate has been about how the City would react," he said. "The view is that the share price would go up, but that might be because RBS would become an obvious takeover target."