NatWest targets HSBC as white knight to scupper Royal Bank bid

NATWEST, THE banking group under siege from a pounds 22bn hostile takeover bid by Bank of Scotland, has identified HSBC as its preferred white knight bidder.

This will disappoint the Royal Bank of Scotland which is widely expected to launch a pounds 25bn counterbid for NatWest today, but has been seeking a formal recommendation from the NatWest board.

The bid will follow the hostile offer launched by RBS's Edinburgh-based rival Bank of Scotland to a stunned City on Friday. Following the bid, Sir David Rowland, NatWest's chairman, moved to shore up NatWest's defences by appointing Dresdner Kleinwort Benson as advisers alongside JP Morgan.

The NatWest board immediately rejected the Bank of Scotland bid as undervaluing the group. Among potential white knight bidders considered by NatWest are the Halifax, and Abbey National. Both banks have ruled themselves out. They have had talks with NatWest in the past but are reluctant to load themselves up with what they see as an inefficient branch network and a commercial lending business that they do not understand.

HSBC, the banking giant that took over Midland in 1992 has the smallest market share of the old big-four clearing banks. Since acquiring Midland, it has dramatically improved performance in whatwas perceived to be the weakest of the major British banks.

One serious obstacle would be the impact on the UK small-business market which has previously been the main objection that has led the competition authorities to veto a merger between the big four banks. But bankers yesterday pointed out that a combined bank would have only just over 40 per cent of the small business market.

Following RBS's comments at the weekend that it had been looking at NatWest for some time, the bank is likely to come under pressure from the Takeover Panel to clarify its intentions. A formal offer today is regarded as a virtual certainty.

Sir George Mathewson, RBS chief executive, appears to have been badly wrong-footed by Peter Burt. The two banks are understood to have recently discussed mounting a joint bid for NatWest. However, the first that the RBS chief executive heard of the rival's strike was at 6.30am on Monday.

RBS is expected to be able to offer between 10 and 15 per cent more than the Bank of Scotland offer.

RBS has room for a higher offer because it has 650 branches south of the border and a substantial English corporate and commercial lending business which offers scope for substantial cost-savings. This potential is not open to Bank of Scotland, which has a minimal physical presence south of the border.