RBS to use $10.5bn Charter buy to expand even further in US

Royal Bank of Scotland will use its $10.5bn (£5.8bn) acquisition of Charter One as a springboard to snap up potentially hundreds of local banks as it continues its march to become one of the largest financial services groups in the US.

Less than 24 hours after RBS unveiled the $44.50-a-share deal to buy the Cleveland-based bank, which almost doubles its presence in the US, speculation was rife about what Fred Goodwin, the bank's acquisitive chief executive, would do next.

Mr Goodwin said Charter One, a "thrift" lender which has focused on offering mortgages to those on low incomes, would take a while to integrate. But he added that the deal expanded the geographic area into states where there are hundreds of banks. "This creates opportunities for us."

RBS will integrate Charter One into Citizens, the Rhode Island retail bank it has owned since 1988, forming America's seventh largest bank, with $129bn of assets. As a result of the deal, 25 per cent of the group's earnings will come from the US.

The City reacted cautiously to the move and RBS's shares fell 97p to 1,625p. It comes after a string of disastrous forays into the American market by British banks including NatWest and Midland, which was subsequently swallowed by HSBC.

RBS has proved its ability to flourish in the US, having turned Citizens into a powerful player both in retail financial services and in small and medium-sized banking.

"The bank we bought in 1988 which was the seventh largest bank in Rhode Island is now the seventh largest bank in the US," Mr Goodwin said.

The RBS chief - nicknamed Fred the Shred after he sliced out excess costs when he accelerated RBS into the club of mega banks with the acquisition of NatWest in 2000 - aims to boost revenues by $378m a year and cut costs by an annualised $185m over three years.

He said jobs would be lost, some of them likely to go from Charter One's headquarters in Cleveland. But over three years employment would be brought back up to current levels. This would be achieved by boosting the number of employees across the enlarged network of 1,400 branches to increase the number of retail and small business products being sold.

The deal expands RBS's business into six new states in the North East and Midwest, including the cities of Chicago, Detroit and Cleveland. As well as increasing the geographic reach, the deal takes Citizens into more densely populated areas. While the move will transform Citizen's potential, it will have a limited impact on the profit and loss account of RBS, Britain's biggest bank. It is likely to add only about 6 per cent to the group's profits next year.

James Leal, an analyst at Teather & Greenwood, said: "This is a sensible deal and I am convinced by the numbers and by RBS's track record. But some people are still looking for the next, bigger, thing from RBS." That is very unlikely to be - at least in the short term - the acquisition of a major player in Britain such as Abbey National, which has been blocked on competition grounds. It would not be difficult for RBS to find the capital to finance another acquisition. It raised £2.5bn through an equity issue yesterday, partly funding the Charter One deal.

It is also generating £3bn a year in excess capital. Mr Goodwin said RBS's capital ratios would be back where they are today by June next year, raising the possibility that the bank could either make further acquisitions or return to previously considered plans of buying back shares.

BANK ON THE WARPATH

Royal Bank of Scotland's deal trail:

1988 - First major foray into the US, buying Citizens Financial of Rhode Island for £235m.

1999 - Pays $1.4bn for UST Corporation of the US.

2000 - Takes over National Westminster Bank for £21bn, the biggest takeover in the history of British banking, after a bid battle with Bank of Scotland, which is now part of HBOS.

2001 - Pays $2.1bn for Mellon Financial retail banking franchise.

June 2002 - Buys US regional savings bank Medford for $273m.

September 2002 - Acquires Commonwealth Bancorp of Pennsylvania for $450m.

April 2003 - Buys Port Financial for $285m to strengthen its foothold in New England.

May 2003 - Pays €486m for the German credit card business of Spanish bank Santander Central Hispano.

June 2003 - Buys UK insurer Churchill from Credit Suisse Group for £1.1bn.

July 2003 - Buys Community Bancorp of Massachusetts for $116m.

September 2003 - RBS's Citizens Financial buys Roxborough Manayunk Bank of Philadelphia for $136m.

October 2003 - Agrees to buy Ireland's First Active for €887m. Coutts, which RBS owns, buys Bank von Ernst & Cie for £228m.

4 May 2004 - Agrees to pay $10.5bn for Charter One, saying deal opens the door to hundreds of further potential acquisitions.