Outlook: Royal Bank

HAVING BEEN rejected by the Barclays board, Sir George Mathewson, chief executive of Royal Bank of Scotland, seems ready to take his campaign for a merger of the two banks direct to shareholders. Can he succeed?

Even in today's City, connections still count for something, and Barclays is certainly not short of them. If Barclays' Sir Peter Middleton really doesn't want to do the deal, that would appear to be that. In any case, Sir Peter might reasonably argue, with the share price back at close to its all-time high, Barclays seems to be fine on its own, not withstanding its lack of both a chief executive and a strategy.

But for how much longer? The share prices of Barclays and Royal Bank are being buoyed by the possibility of a merger. If it doesn't happen, these heights may be hard to sustain.

Sir Peter is plainly enjoying himself in his present stand-in role as chief executive, but he is 65. If he doesn't find a credible chief executive soon, he'll be in trouble. An internal appointment is unlikely to go down well in the City, given that this course of action has already been rejected once as a second-best solution.

In other words, Sir George has rather put Sir Peter on the spot. Relative lack of geographical overlap would limit the cost-cutting potential of a merger, but then anything more would probably be unacceptable to the competition authorities. In any case, if Sir George was even to get close to repeating at Barclays the cost to income ratio he's achieved at Royal Bank, he'd more than justify the exercise in terms of enhanced earnings.

The way Sir Peter sees it, there would be more for Royal Bank shareholders in a merger than for Barclays. There's something in this. Sir George has possibly gone as far as he is going to at Royal Bank. He needs a new challenge, a new soft underbelly to take his scalple to. Inertia and apathy are always the traditional banker's best friends, and right now shareholders seem in no mood to agitate for a merger. All the same, if Barclays' doesn't come up with something convincing soon, Sir George may get his chance after all