Business Comment: No fairytale ending in sight for NatWest

If Rip Van Winkle had woken up yesterday to take a look at NatWest's interim results he might have been forgiven for asking what all the fuss was about. Profits of pounds 775m, a 10 per cent rise in the dividend and a return on capital in its core high street bank that many companies would die for - it is not on the face of it a case study in crisis management.

Sadly NatWest is living not in a fairytale land but a nightmare, largely of the bank's own creation. Analysts left their meeting long faced yesterday, the shares tumbled and the speculation over the group's future and those of its senior managers can only intensify. There are plainly operational problems, but most alarmingly there appears to have been a massive loss of collective nerve at the top which yesterday's ringing declaration of independence has done nothing to redress.

NatWest runs a highly profitable retail and commercial bank but one facing increasing competitive pressures from new entrants. Revenue increases will be hard to find. It also has an investment bank uncomfortably squeezed between the giant American full service operations and the niche players at home. The costs of buying into the big time have been horrendous, the returns so far insignificant.

The investment banking division has shelled out pounds 1bn in the past 18 months on acquisitions and seen its cost base rise from an annualised pounds 800m to pounds 1.2bn. In the first six months of the year its operating income rose by just pounds 30m. That imbalance meant investment banking earned a paltry 2.4 per cent on the capital it employs - in the same period Lloyds TSB earned 40 per cent.

That is an unhappy state of affairs, but it is not the biggest problem facing NatWest. The gravest threat to the group's independence is its lack of confidence in its ability to remain so or its desire to stay that way. In that context, Derek Wanless and Lord Alexander were foolish to sit down with Abbey National and the Pru. Knowing it was so firmly under the spotlight after dropping pounds 90m on an arcane options contract and sacking its investment chief, it was naive to believe those discussions would not leak.

Declarations of independence ring hollow when they only appear to have been made because there is no other offer on the table. If NatWest is to persuade the City it has set its true course, it may need other hands on the tiller.