The Investment Column: NatWest has yet more problems

IN THE normal course of things, a company's board tries to put the best possible spin on annual results. In corporate-speak, "excellent progress" tends to mean "satisfactory" to you or me, and when Mr or Mrs Chief Executive says "satisfactory", it's usually safe to assume things haven't gone quite as well as planned.

What to make, then, of NatWest's annual results, published yesterday and described variously by its management team as "poor", "disappointing" and "dreadful"? Well, in this particular case, investors would be wise if they were to believe the hype. Pre-tax profits for the year to December dropped by 10 per cent to pounds 1.0bn, largely because of last year's debacle at NatWest Markets (NWM), the group's investment banking arm. NWM turned in a pre-tax loss of pounds 706m, compared to a small profit of pounds 98m in 1996.

The relatively mild reaction in the City - NatWest shares finished the day down 21p at 1104p - was due to the fact that everybody had been well prepared for the NWM hit. When NatWest announced the sale of its equities operations last year, it also warned that NWM was going to put a sizeable hole in its 1997 figures.

If it were simply the case that NatWest had now washed its hands of an expensive mistake - namely its equity business - and that the things elsewhere were hunky-dory, investors would have every reason to feel upbeat. Unfortunately for NatWest, things do not seem quite so clear-cut. Yesterday's results contained some worrying signs that, outside the group's core UK bank, there could be more pain in store for shareholders in the months to come.

Coutts, the private banking arm, had a particularly bad time. Its pre- tax profits slumped by 72 per cent to pounds 29m, following over-hasty US expansion. The picture wasn't much better at Gartmore, the fund manager, and Greenwich NatWest, the former NWM debt business.

Gartmore lost a series of high-profile institutional accounts during the year, and business at Greenwich NatWest was hit by uncertainty surrounding NatWest's future strategy for NWM. Neither is it clear where NatWest's corporate advisory boutiques now fit into the group's strategy, given that part of the rationale for buying these businesses was that they generated synergies with the now defunct equities arm.

Shareholders can take some consolation from the performance of the UK bank, which saw pre-tax profits surge by almost 50 per cent to pounds 962m. With a wide-ranging rationalisation and modernisation programme now well underway, the UK bank should continue to increase its profits in the years to come.

Given the worries over NatWest's non-core businesses, why has the stock soared in recent months? The answer is quite simple: because of hopes that some other bank will come along and put NatWest out of its misery. The banking sector has been rife with merger rumours of late, many of them centring on NatWest. But, given its recent attempts to dispel rumours of an up-and-coming deal with arch-rival Barclays, these hopes look increasingly desperate. Unless a concrete bid materialises, the shares will probably slide. Estimates from Salomon Smith Barney put NatWest on forward p/e of around 16, making it look pricey compared to the rest of the banking sector. Steer clear.