Slump in loans leaves NatWest with spare pounds 17bn

THE MORIBUND state of the economy was underlined yesterday when National Westminster, the second of the big five high street banks to report results, said it had the capacity to lend another pounds 17bn worldwide without resorting to a rights issue to raise capital.

But loan demand is so weak that the bank is having to invest some of the new sterling deposits from high street customers in the City money markets rather than lend them to customers.

Announcing profits before tax pounds 295m higher at pounds 405m, after bad debts of pounds 1.9bn, and an unchanged dividend, Lord Alexander, the chairman, said the bank's capital was already strong enough to fund 'sensible demand' for new loans.

Derek Wanless, chief executive, said the bank's successful UK Reserve account attracted an extra pounds 3.3bn from customers last year but 'in the absence of loan demand those deposits funded relatively low-yielding Treasury assets'. Richard Goeltz, finance director, rejected allegations that the bank's cash surplus was due to its unwillingness to lend. 'We are aggressively looking for good, productive, creditworthy borrowers,' he said.

Quashing suggestions that there could be a call on shareholders for new money, or that there could be a shortage of loans as the economy recovers, Lord Alexander said: 'We don't currently anticipate, on the basis of any forecast that we can see, that a rights issue would be either necessary or appropriate.'

The additional pounds 17bn lending capacity cited by Lord Alexander is calculated using a Bank of England method in which loans are weighted by their risk. On this basis, NatWest's risk-weighted lending rose pounds 6.2bn to pounds 107.9bn last year, in sterling and foreign currencies. The bank's total balance sheet before risk-weighting was pounds 143bn.

Mr Goeltz dealt a blow to government hopes that the banks would use their spare cash to help to fund its deficit. He did not think banks would be buying gilts at current interest rates in the UK.

The City expects the Government to change the rules to allow bank purchases of gilts to count in funding the public sector borrowing requirement. Mr Goeltz felt that yields on maturity dates up to three years were too close to short-term money rates, so there was no benefit in switching to gilts. Longer-dated gilts would show a profit but there was an increased risk of capital loss, which NatWest found unacceptable.

The bank confirmed the black hole in its accounts from bad debts, which were down slightly from pounds 1.986bn to pounds 1.860bn after excluding a change of year-end at the finance house subsidiary and releases of past provisions on Third World debt.

The bank said the overwhelming majority of bad debts were from personal customers, medium and small businesses and professional firms, and the south of England was by far the worst affected. Lord Alexander said this highlighted the importance in the UK of avoiding extreme economic cycles.

Before bad debts, profits from UK branch banking were marginally higher at pounds 1.181bn compared with pounds 1.146bn. But defaulting customers drove the business pounds 140m into the red, more than twice the previous year's deficit. For the group as a whole, NatWest would like to see return on capital more than quadrupled from 4 per cent to 17.5 per cent, which Lord Alexander said would be 'adequate'.

Turmoil after Britain's exit from the exchange rate mechanism raised foreign exchange income by pounds 92m to pounds 228m. Mr Wanless said this was due to greater trading volumes and wider spreads, not to speculating against sterling.

The bank's efficiency drive continued with a drop in group staff numbers of 7,200 and another 4,000 expected this year.

Lord Alexander said NatWest had 'no current plans' to end free banking for customers in credit. But he hinted this was in mind when he said that 'in principle the banking industry has to aim for a fair price for individual services with a minimum of cross-subsidisation'.

The shares fell 16p to 443p.