Why Fred is getting credit

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THEY were scratching their heads round at The Royal Bank of Scotland’s London office late in the afternoon last Tuesday, but it was the sort of brain teaser that would force a smile on even the most sullen of bankers. No one could remember the last time the Royal had enjoyed a higher one-day rise in its share price.

The 11% surge in its share followed the bank’s interim results, the first detailed figures since its takeover of NatWest in February. With a 23% jump in half-time profits to 2bn, the results were clearly better than expected. And the noises about the Royal’s progress in integrating NatWest were more than encouraging.

But strictly speaking, the story of how the Scots are knocking NatWest into shape has not changed fundamentally since its 30-day report on the takeover. And the share price itself has performed creditably enough since the Royal Bank completed the 21bn deal. Last Tuesday it exploded into life.

It is as if a switch has been flicked in the Square Mile. The Royal is being seen in a new light, the post-deal trial period is over. The City, it seems, is belatedly giving the bank the benefit of the doubt about squeezing value out of NatWest.

"I think we’ve deserved it with the work that’s gone on here," says chief executive Fred Goodwin. "But there’s a long way still to go and it’s not about the share price on a day, but about the share price over a long time."

Goodwin can afford a little smile, however. The share price rise represented a partial vindication for those long winter months the Royal spent in a tug of war with the Bank of Scotland to clinch NatWest.

The growth in half-time profits was fuelled by 7,500 job losses and consequential savings of 360m, or in other words stark evidence of the cost cuts the Royal promised all those months ago. Another 10,500 jobs are likely to go.

Thousands of people lose their jobs and share prices rise. That’s the harsh reality of what gets City investors going. And, if his critics are to be believed, they have a soul mate in the man who was infamously dubbed ‘Fred the Shred’ in his previous job as chief executive of Clydesdale Bank.

"What we were talking about doing to NatWest was that which needed doing to NatWest," says Goodwin. "It’s interesting that their own plans for the business involved 15,000 job losses. Our plans involved 18,000. You can argue whether there’s a real difference between the two, or not. NatWest’s plans would have made NatWest, once the biggest bank in the world, smaller than Abbey National. Our plans - yes they could involve slightly more job losses - but we’re about creating a world class financial institution that’s got prospects as we go forward."

Goodwin admits his nickname grates a little, but he reflects too that it helped the Royal succeed in its bid when so much of both the attack and defence of NatWest revolved around the potential for cutting costs. "It was resurrected by some of our detractors during the process," recalls Goodwin, "and nothing could have been more helpful. What better to enter the fray than with that?" He adds: "The supreme irony is that at Clydesdale I grew income by more than I cut costs. However, on the basis that ‘Charming’ and ‘Considerate’ didn’t rhyme with Fred, I guess we had to live with ‘Shred’."

Clydesdale was Goodwin’s big break. He joined in 1995 from Touche Ross where he had earlier helped National Australia Bank acquire the Scottish bank.

Goodwin graduated in law but he cut his teeth as an auditor, rising swiftly to become a partner at Touche Ross. In his time at the accountancy firm he was parachuted in to sort out the contractor management at Rosyth Royal Dockyard and became a director of Short Brothers of Northern Ireland in the run-up to its privatisation. By the time of his Clydesdale calling he was embroiled in the worldwide liquidation and sundry delights of BCCI.

FOR all Goodwin’s varied experience, however, there is nothing quite so fraught with potential pitfalls than running a major high street bank today. In no other industry, with the exception of the railways, do company bosses get the continuous buffeting from both shareholders and customers. Do right by the investors and accusations of outrageous profiteering are quick to follow, with politicians usually lobbing in a few bricks for free.

It’s been particularly bad PR this year: branch closures, the charging of non-customers at cash machines and Don Cruickshank’s report into competition in the sector claiming the banks have been ripping off consumers by up to 5bn. Last week Barclays alienated everyone after discovering security breaches in its online bank and watching its shares slump despite posting a big rise in profits.

In the event the government’s response to Cruickshank’s report came on Friday with a much more benign series of regulatory measures for the sector than anticipated.

Even so, Goodwin, on his second anniversary at the Royal Bank of Scotland, knows he treads a fine line between hero and villain for the respective constituencies he’s serving. "Yes I’ve cut costs in my day. Yes I continue to cut costs, but what I’m interested in is driving up returns for shareholders," he says. "I actually think, verging on the passionately, that what works is what’s good for the shareholders, the customers and the staff. If you get a situation where something’s good for the staff and customers but not good for the shareholders it’s probably going to end in tears."

The Royal has at least made a virtue of its branches and indeed it swiftly stopped NatWest’s closure programme. In doing so it claims to have lost no customers at all.

As for the way the internet is influencing banking, Goodwin is less concerned about technology flaws than he is dismissive about the threat to the Royal from new online entrants to the market such as Egg. The Scots have embraced new technology in joint ventures with the likes of Tesco and as Goodwin argues: "The ability to leverage our platform gives us a big advantage."

The potential for the Royal Bank to carry out "processing for other organisations" is the one area of expansion that Goodwin will admit to. He is not about to float off a stand-alone online bank, however. He seems to regard this species as banking’s equivalent of the one-trick pony, with consumer-friendly interest rates that are difficult to convert into profits. "Totally foreseeable" is how Goodwin describes Egg’s dismal stockmarket debut this year. "All Egg seems to have proved is that you can buy customers," he says.

In keeping NatWest’s customers the Royal has also managed to cut the cost-income ratio of the combined business - the proportion of revenue swallowed up by running costs - from 60% to 55.7% and analysts reckon Goodwin would want reduce it further to 40%. It would be some achievement.

"We have a 7.1bn cost base," says Goodwin. "There’s no reason why it can’t be 15bn providing we get the income to go with it. One of the great successes of the Royal Bank during the 1990s is that for every pound we put on the income we put fewer pounds on the cost."

And there lies the continuing challenge, post-NatWest, regardless of the calls by some in the City for the Royal Bank to hit the acquisition trail once this first year of integration is over. But there is, Goodwin insists, no vision for what Royal Bank will look like in the long term. "For me it’s about direction and the journey," he says. "I’ve seen lots of organisations become enslaved by pushing towards an objective which has actually been overtaken by time."

The key, says Goodwin, is for Royal Bank of Scotland to keep its options open. If nothing else, it should be an interesting journey.