RBS ready to embark on £1.5bn spending spree

Royal Bank of Scotland, Britain's second biggest bank, yesterday laid out plans to use £1.5bn of capital it will generate from next year to fund a major share buy-back programme as well as for snapping up further acquisitions.

Fred Goodwin, chief executive of the group, announced the move as RBS recorded a 10 per cent rise in first-half profit to £3.45bn. RBS has been the most acquisitive bank in Britain in the past few years, snapping up NatWest in 2000 and Citizens in the US. The bank is swallowing Churchill, the general insurer, and has also bought a raft of smaller operations in the US and elsewhere. The buying spree is set to continue, partly funded by £1.5bn of capital it will save as of December when special payments to shareholders to fund the NatWest deal comes to an end.

However, Mr Goodwin warned, much of the cash might be returned to shareholders if attractive acquisitions did not present themselves in the short-term. The bank would then ask shareholders for cash when it does find deals it wants to pursue. "We do not want to build up a war chest because history has been extremely unkind to companies that do," Mr Goodwin said.

RBS, which has a relatively small presence in the UK mortgage market compared with its rivals, has been rumoured to be eyeing Abbey National, the second biggest provider of home loans in the UK. But Mr Goodwin said now was not the time to buy a mortgage bank, "because they are in for a period of slowdown". He also highlighted competition problems with a potential tie-up with Abbey. RBS's shares fell 85p to 1657p, making it the biggest faller in the FTSE 100.

Mr Goodwin conceded that RBS's cost reduction programme has slowed - a situation which is "inevitable when a business approaches its maximum level of efficiency". But he insisted there were more ways to improve the cost-income ratio and said he would have to "consider" outsourcing some of RBS's processing business to India, where employment costs are much lower.

Margins are expected to be slightly eroded in the second half, as low interest rates pinch profitability, and because of extra costs imposed by the Competition Commission on providing small business accounts.