Yesterday's move, which caught the City by surprise, was presented by executives of Bank of Scotland as a struggle by a smaller, leaner outfit to teach its big brother a business lesson.
Sir Jack Shaw, governor of Bank of Scotland, said: "NatWest has a history of underperformance... Its proposed acquisition of Legal & General does not address NatWest's long-term problem; its relative inability to extract value from its core banking business."
It is a message that industry watchers say has the ring of truth. NatWest, one of the UK's big four high-street banks, has seen its fortunes decline over the 1990s. In 1997 provisions for bad debts in Asia jumped, eating into profits, and its investment banking division racked up losses of pounds 706m.
The company, which before yesterday's bid had a market capitalisation of pounds 17.7bn compared with Bank of Scotland's pounds 8.9bn, has since launched an overhaul to generate greater returns from its retail banking business.
NatWest's employee headcount of 64,400 is set to be pruned by about 10,000 through the introduction of new technology. The poorly performing investment banking arm has been broken up and sold off.
Should the bank manage to retain its independence, NatWest's executives would be hoping to extend pre-tax profits beyond last year's figure of pounds 2.1bn. However, the future of its pounds 10.8bn bid for L&G, the insurance company, has been thrown into doubt.
Critics say that despite the revamp NatWest, which was formed from the merger of three banks - the District, National Provisional and Westminster - still fails to deliver value from its main business. Analysts yesterday pointed to NatWest's average return on equity over the past five years of 14 per cent compared with Bank of Scotland's 23 per cent.
At the same time, NatWest has been overtaken by Midland, which was absorbed by HSBC, the world's largest banking group. Lloyds has also moved ahead, boosting its market capitalisation and high-street profile with the acquisition of TSB.
Barclays Bank is about one-and-a-half times the size of NatWest, but it also faces considerable problems generating returns.
Bank of Scotland, which turned in pre-tax profits last year of pounds 8.9bn, has a reputation within the industry for a relentless focus on cost management.
The Edinburgh-based business, which has 22,700 employees, was founded in 1695 and has grown through amalgamations. Its principal subsidiaries are British Linen Bank, acquired in 1971 and developed as its merchant banking arm, and the Bank of Wales, established in 1986.
Bank of Scotland bought Bank of Western Australia, based in Perth, in 1995.Reuse content