Bank on RBS to secure a judicious takeover deal

Northern exposure lifts Bellway; NCipher not the one for new investors

As the banking sector reporting season comes to a close this week, Fred Goodwin has conspicuously been the only chief executive to sport his bank's corporate tie as he presents his figures to the City. Indeed, the whole top team were in uniform yesterday, as the Royal Bank of Scotland showed yet more evidence of the corporate discipline and attention to detail that has made it one of the most impressive performers of recent years.

And yet there was an end of an era feel yesterday. Not because Mr Goodwin is anywhere near departing - Heaven forbid, given his extraordinary track record of deal-doing and cost-slashing. The feeling is that RBS has come to the end of a phase of growth driven by cost savings from its audacious takeover of NatWest in 2000, which has seen the fat taken out of the acquired bank and a little Scottish fiscal prudence brought to bear. The decline in costs as a proportion of income (see graph) is testament to that.

But the pips are squealing, so growth must come from elsewhere. At the same time, RBS will find itself with cash coming out of its ears, as the mighty retail banking businesses in the UK and, increasingly, the US are no longer used to fulfill the deferred payments for NatWest.

All this points to another big acquisition, particularly since RBS is going to struggle to grow sales in the competitive UK market. Maybe Abbey National, to boost its weak position in the UK mortgage market? More likely, something in the US to add to the Citizens bank which - against most predictions - it has successfully grown into a significant force in New England. The risk is that RBS will be tempted into something too high risk or too expensive, but Mr Goodwin's track record suggests otherwise.

There are other risks, including that RBS has bought Churchill just as the insurance market embarks on a period of dog-eat-dog competition. But a share buy-back, on top of an undemanding price-earnings multiple of 11 and a 3 per cent dividend yield, combine to make RBS a core holding.

Northern exposure lifts Bellway

Bellway's decision to move away from the high-rise, high priced London market a couple of years ago is looking pretty clever given what is happening at the top end of the housing market in the capital. The mid-sized housebuilding group is now enjoying the benefits of surging prices in its North of England heartland, where it is building in more upmarket areas than before, and from the continuing strength in modestly priced suburban family homes in the South.

A trading update revealed yesterday that the average Bellway home is now 20 per cent higher than a year ago. Better still, the company reassured that operating margins have continued to improve. That is important because investors have feared the last six months have been tough, especially compared with the first half of 2002, which now looks like the red hot peak of the housing market.

Bellway shares (down a ha'penny to 641p) trade on a derisory 6.5 times earnings, but that's about the sector average and a substantial re-rating will have to wait until the other side of the housing market cycle, when the true mettle of the sector can be proved. The odds are still that, with planning rules so tight and demographic changes in their favour, the housing shortage should keep profits high.

In the meantime, worries over rising mortgage rates should be offset by Bellway's northern exposure. Hold.

NCipher not the one for new investors

After being a leading light of the dot.com boom, nCipher has struggled to live up to its reputation. The company's technology allows customers, including Barclays and Mastercard, to send documents securely over the internet.

Its great strength has always been its cash pile, and even after handing back £64m to shareholders, it still has £39m left on the balance sheet. In the six months to June, operating losses fell to £1.4m from £4.6m the year before.

Its weakness has been stuttering top line growth. Like other software firms, nCipher has limited visibility on what lies ahead. It can forecast sales for maybe the next three months at best. What we do know is customers aren't suddenly splashing out on new kit.

Besides which, the core market it is targeting is relatively small, worth barely $100m. The great hope is that nCipher will get more business in the field of credit card authentication on the internet.

Thanks to its cash, the company's shares give a relatively safe way of getting exposure to a potential growth story, and current holders should stick with it. But they have more than doubled in the last six months thanks to the Nasdaq-led tech sector rally. Until real evidence of top line growth emerges, and the company successfully branches out into new markets, nCipher is not exciting enough for new investors.