Senior RBS executives are this weekend working on a plan to top Bank of Scotland's pounds 22.1bn hostile bid for NatWest, which was announced on Friday.
RBS, which has more than 400 branches in England compared with Bank of Scotland's two, believes that it can afford to pay more because of the additional cost savings a deal would deliver. The announcement of a rival bid may be timed to coincide with Bank of Scotland's interim results, due out on Wednesday.
With Abbey National and Halifax also thought to be interested in NatWest, the RBS bid could be the first of several attempts to thwart Bank of Scotland. Although NatWest shares jumped almost 30 per cent on Friday, they are still considered to be cheap. The share price has been undermined by suspicions that NatWest is overpaying for Legal & General, the insurance company it had agreed to buy for pounds 10.75bn.
NatWest's only hope of retaining control of its destiny appears to lie in finding a "white knight" for a friendly merger. Halifax is thought to be NatWest's best hope for an amicable partner.
A higher bid from RBS is likely to win the support of NatWest's shareholders, who have become increasingly concerned with the bank's under-performing share price. It is believed that Mercury Asset Management, which owns 4.01 per cent of NatWest, has pledged informally to back a hostile bidder for the bank. Other NatWest investors, notably Standard Life, have also indicated that a bidder would receive their support. However, NatWest has advised shareholders to reject the bid.
"Bank of Scotland would not have gone into this without knowing that big shareholders would support it," said one banker familiar with the bid.
An offer from RBS would be along the lines of a previous approach it made earlier this year to Barclays. On that occasion, RBS planned an effective reverse takeover of the bank to parachute its own management into the Barclays boardroom. Sir George Mathewson, the RBS chief executive, is known to hold England's banking establishment in low regard.
RBS is especially eager to prevent a deal between Bank of Scotland, its arch-rival, and NatWest after its plan for a parallel deal with Barclays failed. A successful Bank of Scotland bid would create a pounds 30bn banking giant that would dwarf RBS, whose market capitalisation of pounds 10.2bn is currently about pounds 1.5bn higher than Bank of Scotland's.
Bank of Scotland was last night trying to distance itself from reports that it planned wholesale closures of NatWest branches that would lead to heavy job losses. However, banking analysts believe that a deal between RBS and NatWest would see the latter's branch network hugely reduced.
Analysts believe Bank of Scotland's bid has forced NatWest to shelve the planned acquisition of L&G. NatWest revealed on Friday that it had cancelled next month's egm when the deal was scheduled to go before shareholders. Although the bank insisted that it still intended to go through with the L&G deal, others believe that the need for a robust defence against these predatory advances will come first. Bank of Scotland is not interested in L&G.