Profit surge at RBS boosts merger case

SIR GEORGE MATHEWSON, chief executive of Royal Bank of Scotland, yesterday backed his case for a merger with Barclays Bank by announcing a 19 per cent rise in pre-tax profits at the halfway stage.

The headline numbers came in a touch ahead of City forecasts at pounds 531m, up from pounds 448m in the period last year, largely as a result of strong growth in both corporate and personal lending by the bank.

Fred Goodwin, the deputy chief executive, said that strong growth in both corporate and personal lending was driving the profits growth across the board.

Mr Goodwin also took satisfaction from the performance of the bank's new business lines, including the supermarket banking joint venture with Tesco, which had managed to add on new customers at a rapid rate while reducing losses from pounds 37m in the first half of 1998 to pounds 25m this time.

The half-year results included a full contribution for the first time from Angel Trains, the rolling-stock leasing business, while the credit cards side of the operation has been broken out as a separate business line following the merger of RBS Advanta with the bank's existing cards business last year.

Mr Goodwin said: "What we are pleased about is that the rise comes from what was already a very high base. The performance of the UK bank can comfortably be described as motoring," he said.

Most of the lending growth came in the corporate market sector, where the bank took a brave decision to continue lending when other banks withdrew from the market altogether following last autumn's stock market crash and the bond market shutdown.

As a result of this decision, the bank saw lending to the corporate sector rise by 21 per cent to pounds 4.6bn. Personal advances were also up, by 32 per cent to pounds 1.6bn.

Mr Goodwin insisted that the growth had been achieved without sacrificing the group's lending criteria. In fact, bad debt provisions rose by a relatively modest pounds 27m to pounds 109m, largely due to the bank's policy of setting aside more provisions to reflect a larger loan book. As a proportion of the loan book, provisions remained static at 1.5 per cent.

Although operating costs were up 10 per cent to pounds 1.01bn, the group's ability to grow the top line faster meant that the cost/income ratio fell from 52.9 per cent to 15.8 per cent.

The bank's shares have had a fabulous run this year, rising by more than 45 per cent in the past four months. Much of the enthusiasm for the stock stems from the takeover speculation with which Royal Bank of Scotland has been associated for much of the past five years.

That has tended to overshadow what has been a genuine growth story - one that is all too rare in a sector generally characterised by mature commoditised business and a dearth of real innovation.

Sir George cheekily presented a comparative table of profitability over the past five years throughout the UK banking sector, which showed Royal Bank of Scotland way ahead of the pack.

Yesterday's numbers suggest the bank will easily make pounds 1.15bn in the full year, putting the shares on a price/earnings ratio of 17 - demanding but not excessive. Hold on.