Is Sir Fred set to raise the roof again?

IF it were a Formula One car, its current lack of eye-catching activity would be seen as a servicing break - a period of fine-tuning in preparation for the next bout of breakneck-speed action.

Britain’s second-biggest bank isn’t a high-octane racing car, but it certainly is a high-performance money-making machine.

Right now, the Royal Bank of Scotland is cracking open the champagne on the top of British banking’s podium, having clocked up a 15 per cent increase in annual profit to £8.1 billion. That means it has achieved its 11th consecutive year of double-digit profit growth.

Sir Fred Goodwin says the RBS is not "at the moment" thinking about any more additions to the business, but it seems that’s unlikely to be the case for long. One thing that is certain is that the Edinburgh-based bank didn’t achieve its current lofty position in the world banking rankings by plodding along in the slow lane, as last month’s signing of a multi-million pound, five-year sponsorship deal with the Williams F1 team illustrates.

So the question now is: where does RBS go from here - apart from its £350m new HQ at Gogarburn? After all, Sir Fred did not categorically rule out more buy-ups.

Having secured 22 acquisitions since March 2000 - from its transformational takeover of NatWest for £21bn to the £5.5bn takeover of Cleveland-based Charter One last August - it seems appropriate for Sir Fred and his management team to stop and draw breath, even if the rumour mill doesn’t.

RBS was linked with a takeover of British bank Abbey last year, playing down interest based on competition grounds. Speculation has also linked it with some of Germany’s biggest banks, such as Commerzbank or Postbank.

Last November, Achim Klueber, the head of RBS’s German operations, said: "We can only grow to a limited extent organically, so tactical acquisitions, if needed, are an option."

More recently, it has been linked with a swoop for Dutch rival ABN Amro.

At the time of the Williams deal, the group’s director of communication, Howard Moody, said RBS had now "reached a scale in both size and international reach where a step change in our profile is required to ensure our brand recognition keeps pace with where our business is".

But, for the time being, we’ll have to take Sir Fred on his word that his priority is to firmly bed the Charter One acquisition into the RBS global network and wring more out of what the RBS group already has.

"The underlying need for acquisitions is at a low ebb. In the near term, the focus is on completing the one acquisition and taking advantage of the organic growth opportunity," Sir Fred states. His view is that the latest figures clearly "demonstrate the group’s ability to sustain growth across the broad range of our businesses".

Richard Peirson, an analyst with Framlington Investment Management, says while the profit and turnover numbers for 2004 were "absolutely fine", Sir Fred’s most positive comment was "that there won’t be a major US acquisition".

Mr Peirson adds: "There will be more of the same and they should build on what they have got and create a bit of shareholder value." Even so, he’s also of the view that RBS "will be out there buying something at some stage".

Michael Gifford, a banking sector analyst at F&C Asset Management, says RBS, with its profit warchest, could have given shareholders more by way of the dividend, seeing the 15 per cent full-year increase to 58 pence as rather puny. And in the absence of any new share buyback, he reckons that Sir Fred is "hoarding the cash for his next acquisition".

"We will remain at the ‘unlikely’ end of the ‘maybe’ spectrum (on buybacks)," says Sir Fred. "We do actively consider share buybacks. They are one of the things that feature on our radar screen," he offers.

One firm dismissal, however, is the prospect of an RBS assault on China. Sir Fred says: "The acquisition route is an unlikely one to pursue," adding that RBS was "looking more at joint ventures in particular product areas". He points out that Bank of China had denied that RBS was on a list of bidders for a stake in the Chinese lender.

RBS’s revenues, at £22.75bn, were up 18 per cent and were helped by its recent takeovers, including a four-month contribution from Charter One and a full year from insurer Churchill. But even stripping out takeovers and currency fluctuations, revenue still rose 11 per cent, underlining the organic growth opportunities the man dubbed "Fred the Shred" speaks of.

Since 2000, RBS has transformed itself from a key Scottish player into the world’s fifth-biggest bank by market value, with the company worth just under £58bn - a far cry from the £45m value it had in 1965. RBS now earns 30 per cent of its profit overseas, with less than ten per cent of its UK income stemming from retail banking.

The biggest rises over the year in terms of profit came from RBS Insurance - which includes Churchill and Direct Line - which weighed in with a 42 per cent jump to £862m. Following that were Ulster Bank, up 32 per cent to £468m; its US arm Citizens, up 21 per cent to £1.04bn; and its Retail Direct (home to its credit lending business) and Corporate Banking and Financial Markets arms, which both scored 18 per cent increases to £3.28bn and £4.27bn respectively.

Despite the strength of its CBFM unit, Sir Fred ruled out any suggestion that RBS might be heading down the merger and acquisition advice route. He says the banks was "categorically not" looking at becoming an investment bank in the mould of banks such as JP Morgan or Goldman Sachs.

Offsetting the massive profits was the £2.44bn costs RBS forked out on staff wages and other running costs listed under the mystifying heading of "manufacturing".

Like most British banks, RBS benefited from soaring consumer and business lending, a strong housing market and low levels of bad debt as the UK enjoyed its longest period of growth for 200 years. But there are fears that following a succession of interest rate rises, revenue growth may slow and bad debt increase.

On Wednesday, market analysts revealed that the British adult’s average consumer debt had jumped by 45 per cent since 2000 to £4004. And the British Bankers’ Association’s latest lending figures for January show a 21 per cent fall in mortgage advances.

Sir Fred, having seen cooling demand for loans this year trim net interest margin - a measure of lending profitability - to 2.92 per cent, from 2.97 per cent, says the outlook for this year is for another "slight deterioration".

Bryan Johnston, divisional director at Bell Lawrie White, says RBS’s strategy to develop a global footprint has been very successful to date, as have its acquisitions. "But they have also done well in growing organically," he adds.

"I would certainly look for further acquisitions overseas, as RBS doesn’t need the regulatory grief of going for a smaller British bank. Fred Goodwin has shown little interest in going after a French or German bank, so any further future acquisitions are likely to be in the United States or the Antipodes."

He adds: "The American banking community is very fragmented, so they may go for a big one there or maybe be happy with a steady stream of smaller buys."

Fred the Shred? His feat in lifting RBS from the lower leagues of Britain’s banking sector into the global banking industry’s top tier could see Goodwin renamed Fred the Shrewd.

Charting a Royal road to riches
THE Royal Bank of Scotland was founded by royal charter in Edinburgh in 1727 and, within a year, had invented the overdraft.

In 1777, RBS became the first bank in Europe to print multi-coloured banknotes in an effort to combat early counterfeiters, printing the head of the then king in red and the denomination in blue (150 years before the Bank of England).

It opened its first branch in Glasgow in 1783 and went on to grow a large network of offices throughout Scotland during the 19th Century.

In 1874 it opened a branch office in London and, from the 1920s onwards, created a major presence for itself in England through the acquisition of historic banks such as Drummonds, which was set up in 1712, Child & Co, which dates back to the 1580s, and Glyn, Mills & Co.

By 1970, it was responsible for more than 40 per cent of Scotland’s banking business following its merger with Edinburgh-based National Commerce Bank of Scotland.

It traded as Williams and Glyn’s in England and Wales until 1985, when the business took on the Royal Bank of Scotland name.

The 1980s saw the group move in a number of new directions, setting up car insurance company Direct Line and acquiring America’s Citizens Financial Group. These were followed by joint financial services ventures with Tesco and Virgin Direct.

Its most momentous event of recent years came in 2000 when it acquired NatWest bank - the biggest takeover in the history of British banking. NatWest continues to operate as a separate brand on the high street.

Last year it bought America’s Charter One Financial for £5.8 billion, meaning it now generates about a quarter of its profits from the United States.

In the past five years, the bank has gone on to become a global force, virtually doubling profits from £4.25 billion in 2000 to £8.1bn in 2004.