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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The author has written several books about the City and Wall Street
According to the law of financial cycles, a rule invented by the veteran City journalist Christopher Fildes, disasters happen when the final person able to remember the last one has retired. It is an aphorism that the board of NatWest might consider as they plan for a future newly free of state ownership.
NatWest is the rebranded name for RBS, which took it over in 2000. The enlarged bank embarked on a highly leveraged, acquisition-pumped strategy. All of NatWest’s current senior management and board appear to have been professionally active during the subsequent global financial crisis in 2008. A repetition of former chief executive Fred Goodwin’s hubristic growth plan therefore seems unlikely while the bank’s leadership can remember its traumatic demise and the government’s £46bn bailout.
But it is what happened to NatWest before, in the last quarter of the 20th century, to which Fildes’ law applies. This was a sorry tale of how a well-run bank frittered away its reputation.
NatWest was formed in 1970 through the merger of the Westminster, District and National Provincial banks. It became a national retail bank and a good one, surviving the industry’s banking crisis of 1974. It was low key, dogged and conservative and by 1986 had overtaken its great rival Barclays as the market leader in UK banking. That was about as good as it got.
The 1980s was a decade of fashionable financial services conglomerates, led by Citigroup and Chase in the US and spiced by financial services deregulation through the UK’s Big Bang. NatWest decided to join the universal banking big league and throughout the 1980s it expanded into retail banking in Europe and the US and investment banking globally. I worked at the investment bank for six years. It was often loss making and accident prone. The overseas retail banks were at best flag planting operations and at worst serious loss makers.
While this was going on, NatWest UK remained highly profitable through branch rationalisation, investment in technology and a conservative lending policy. The UK banking business returned 25.6 per cent on equity in 1997. Poor results from the rest of the business dragged down the overall group return to 7.8 per cent.
Between 1993 and 1998, NatWest had the highest cost-income ratio of any top 10 UK bank. This closely watched metric was regarded in the City as a barometer of management effectiveness. The share price therefore underperformed that of other banks, including the resurgent Lloyds and Barclays, which NatWest saw as a bitter rival.
Under shareholder pressure, NatWest refocused. It sold its US retail business in 1995 (albeit for a price that analysts thought too low) and got rid of most of its investment bank in 1997. Its network of European retail banks was quietly exited.
But instead of stopping there and preparing the prized UK retail bank to see off competition from newly privatised building societies, the board was determined to diversify. In 1999 it bid for Legal & General with a plan to create a ‘bancassurance’ business, cross-selling banking, insurance and investment products. The concept was all the rage in financial services circles but NatWest’s management lacked the credibility to be entrusted with such an ambitious plan.
The bank then became a target itself and after an opportunistic bid from the smaller Bank of Scotland, its Legal & General offer lapsed. RBS was watching, trumped the Bank of Scotland and took over NatWest early in 2000. “I think the weight of history was against us” said Natwest’s departing chair. Fildes’ Law in action: the bancassurance plan was too much, too soon. Shareholders could still remember.
Now a new era begins. The UK government sold its remaining shares in the bank at the end of last month. Corporate fashions come and go but the need to focus on a core business is constant. This is not the most exciting aspect of governance but it is the most important. Nor is it easy, especially in today’s tumultuous banking environment. Balancing growth with prudent risk management, adapting to artificial intelligence, meeting competition from fintechs and other challenger banks all against a difficult economic background requires skill and discipline to resolve.
In the 1990s, NatWest blew its hard won leadership position in domestic banking through overly ambitious diversification. Having regained credibility and freedom through 17 years of patient rebuild, today’s board will wish to avoid repeating the errors of a previous generation, this writer included.
