Why NatWest is heading for inevitable shake-up

Something must be about to happen at National Westminster Bank. The press often gets it wrong when it turns the spotlight of scrutiny on a company in apparent turmoil, and much of the recent speculation concerning NatWest has been misinformed. However, the sheer quantity of it, and NatWest's continued inability to put a lid on it all, would tend to suggest that this is more than a problem of public relations, that there are fundamental difficulties and processes at work here. Even if something is not already afoot, it is likely soon to be.

Some, at least, of this speculation is almost bound to prove self fulfiling. There are now such clear signs of disarray at NatWest that institutional shareholders will soon be demanding action, if they haven't already. Curiously, though, the best informed of this speculation is something that definitely won't happen. This is the old chestnut that NatWest should be merged with Barclays, a story which was probably first floated by Barclays itself and has now taken on a momentum of its own.

Nobody can blame Martin Taylor, chief executive of Barclays, for trying it on. If there is any possibility of being able to do it, Mr Taylor would be failing his shareholders by not pursuing the opportunity. The potential for cost savings and monopoly profit, if such a transaction could be pulled off, might be vast.

The opportunity has also been quite cleverly pursued. NatWest seemed to put itself in play by holding merger talks, unsuccessfully, first with Abbey National and then with the Prudential. If those two aren't prepared to do a deal with NatWest, we certainly would, Barclays seems to be saying. At last here's an opportunity for the big league consolidation the British banking industry so desperately needs, is the spin being put on it.

To be fair, Mr Taylor and his chairman, Andrew Buxton, both straightforward and realistic bankers, have always acknowledged that the competition hurdles would be formidable and possibly insurmountable. Even so, there seems to be a clear and well used strategy being applied here, which is that if you float the idea often enough, you might eventually wear everyone down and in time they could come to accept your point of view. At the very least, the possibility of a bid destabilises a major competitor.

In truth, the whole thing is not nearly as far down the line as some reports this week would suggest. There has been no approach by Barclays to NatWest, and it is not altogether clear that the Office of Fair Trading has yet been consulted by Barclays on the competition issues.

On the other hand, there wouldn't actually be a lot of point in Barclays seeking confidential OFT guidance. It must already know what the answer would be; the combined bank would have such a dominant share of small business lending, retail outlets and credit card business that there would be no way of constructing such a merger in a manner that would avoid a Monopolies and Mergers Commission reference. Furthermore, the chances of the MMC approving such an anticompetitive takeover are so remote as to be scarcely worth considering as a possible outcome.

The whole idea, in other words, is just a lot of corporatist nonsense. Certainly it would be profoundly against the public interest. It is not even altogether clear it would be in the long term interests of shareholders either. The size of the management task in merging these two organisations could easily prove a lethal distraction during a period of rapid change for the banking industry.

Already the two main Scottish banks, Royal Bank of Scotland and Bank of Scotland, are outmanoeuvring their bigger brethren south of the border with new forms of low cost, supermarket and generally more user friendly banking. Yesterday brought news that Standard Life is planning a low cost, high interest rate, telephone banking service, providing a new threat to the fat margins and profits of the established English clearers.

There may come a day, perhaps five years into the single currency after fully deregulated, no-frontiers banking has become a reality, and the newer forms of low cost banking are seriously entrenched in the market, when it might be possible for the competition authorities to consider such a merger. But for the time being, it is a complete non starter.

Where does that leave NatWest? Like Barclays itself, going it alone, seems to be the answer. The problem is that NatWest has so obviously misjudged and mishandled its affairs in recent years that it is not at all clear the present regime is up to the task. Derek Wanless, the chief executive, has recently set out challenging targets for improvement in return on capital and costs, which he is determined to achieve. He may or may not be given the benefit of the doubt by the City.

Unfortunately, the City does not appear inclined to apply the same degree of leniency to Lord Alexander, the chairman. Hired in the wake of the Blue Arrow debacle, he seemed initially to do a good job in restabilising the bank. He also deserves credit for some necessary and well executed restructuring, particularly the disposal of NatWest Corp in the US. But the headlong expansion into investment banking has proved a costly mistake while NatWest's likely exit from this business looks like being as humiliating and shambolic as that of Barclays. Meanwhile the core domestic business seems to have been allowed to drift. The same is true of Coutts, once a market leader in private banking.

Some senior management change therefore looks pretty much inevitable. Round at Barclays, the fiasco of the BZW disposal has rather knocked the halo from Mr Taylor's head, but at least his job isn't in doubt. Such has been the recovery in Barclays' fortunes under Mr Taylor that he needs to do quite a lot wrong before he loses his star status in the City. Barclays has achieved greater things than NatWest in the past three years, undoubtedly, but the challenge faced in its core domestic business is the same. It is very hard to see how it can expand in the new forms of low cost banking that will eventually sweep the market without undermining its present margins and customer base. Solutions are in short supply.