No one saw takeover by UK Government
THROUGH the 1990s, the question of whether or not Scotland’s two biggest banks could retain their independence was a very big one.
And it was viewed, quite rightly, as an extremely important matter. In the corporate world, amid consolidation activity, the issue of where the decisionmaking is done is always a crucial one. Head offices are vital to healthy economies. It is difficult to overestimate the advantage to employees and the broader business ecosystem of being part of or close to a corporate operation which is the seat of power, rather than a mere branch-type function exposed to big calls about its future being made at a distance. In short, head office locations are a big deal.
The spotlight shone brightly on whether or not Bank of Scotland and Royal Bank of Scotland could retain their independence for much of the 1990s. Of course, this had also been a big issue in the previous decade, with an ultimately unsuccessful hostile bid for Royal Bank of Scotland by Hongkong and Shanghai Banking Corporation.
The matter was thrown into stark relief in 1996 when Standard Life, at that time a traditional life and pensions office quite different to the investment management group into which it has evolved, decided to sell a 32.2 per cent stake in Bank of Scotland. This stake, given it was held by a fellow Edinburgh-based financial institution, had long been viewed as something likely to stop a hostile bidder taking a tilt at Bank of Scotland.
When Standard Life decided to sell the stake, the fear was that this had put Bank of Scotland “in play” in terms of an unwanted takeover. The matter understandably turned into something of a soap opera in the Scottish financial sector. It was correctly viewed as an issue of national importance to Scotland and became a political hot potato.
In the end, the incident passed off peacefully, with the Standard Life stake spread among a raft of buyers rather than being sold to a single purchaser which might have been interested in acquiring Bank of Scotland, or in large blocks which could ultimately have facilitated a takeover.
Royal Bank of Scotland, by virtue of its size in a UK context, had also remained the subject of repeated speculation that it might be acquired by a larger player, with occasional stock market rumours about HSBC being interested.
Everything changed in the autumn of 1999, when Bank of Scotland launched a hostile bid for Natwest. A bid battle ensued when Royal Bank of Scotland launched a rival offer for this “big four” UK bank. And, in early 2000, Royal Bank of Scotland emerged victorious in the contest.
Alison Rose, the current chief executive of the corporate entity which was called Royal Bank of Scotland and has recently been renamed Natwest Group, worked for the English bank at the time of the 1999/2000 battle for it between the venerable Scottish institutions, which were viewed by some in the City as upstarts. Ms Rose had joined Natwest through its graduate scheme in 1992.
The move on Natwest by Bank of Scotland was a huge surprise to most back in 1999. Royal Bank’s subsequent rival bid was less so, partly because by that time the City had got used to the possibility of a smaller player acquiring a much larger one.
The relative size question, of course, was what made this all particularly interesting.
Moreover, conventional wisdom was that hostile bids for banks were unlikely to be successful, not least because takeovers in the sector were generally viewed as having to be accompanied by extensive due diligence, going over the books of a target with a fine toothcomb to know exactly what was being bought.
Natwest appeared to prove this conventional wisdom wrong (though only for a while).
Royal Bank of Scotland, which was led by Sir George Mathewson with Fred
Goodwin as his deputy chief executive during the bid battle, integrated Natwest very successfully. Natwest was basically a sound bank which had been viewed as inefficient in terms of its costs by the City.
Later, the consortium bid for Dutch banking giant ABN Amro by Royal Bank of Scotland, with partners Santander and Fortis, would raise the question of whether the previous conventional wisdom on hostile takeovers in this sector might in fact be on the money.
For a while though, it was from the perspective of the Scottish economy very encouraging indeed to see a heavyweight UK and international bank based firmly in Scotland. The commitment of Royal
Bank’s board at that time to continue to have its head office in Scotland, not merely in a brass-plaque sense but in every realistic way, was clear for all to see. Before the most troublesome ABN Amro deal, Royal Bank of Scotland had enjoyed some major success in overseas markets. The Scottish bank, from having been viewed as a perennial takeover target, was a very big deal indeed not just on the UK but on the international stage. And, to reiterate, it was most definitely run from Scotland.
Bank of Scotland meanwhile, back in 2001, merged with Halifax, a deal revealed exclusively by The Herald. The head office of the resultant HBOS entity was also in Edinburgh. HBOS seemed in some ways, given Halifax’s chief executive James Crosby took the same job in the enlarged group, a bit less firmly based in and driven from Scotland but its head office on the Mound nevertheless seemed in some important ways to be a seat of power.
Then the global financial crisis struck. HBOS, which had ramped up its corporate lending book dramatically and was exposed heavily to sectors such as commercial property which were hammered when the crisis got under way in earnest in 2008, found itself having to be rescued by what was then Lloyds TSB, in a deal which required many billions of pounds of UK taxpayer support.
Royal Bank of Scotland required a massive bail-out. It remained independent in the sense of being a standalone business but the UK Government effectively emerged as the controlling
shareholder by dint of the bail-out with taxpayers’ money.
The enlarged Lloyds Banking Group has seen the stake which the UK Government took in it returned to the private sector through a series of share sales.
However, more than a decade after the financial crisis, the UK Government still owns about 62% of what was Royal Bank of Scotland and is now called Natwest Group. Ms Rose, who presided over the name change, has retained Royal Bank of Scotland as a brand north of the Border.
The spotlight shone again last week on the question of the headquarters of this financial institution, which remains a big player in a UK context even if it has under the ownership of the Government retrenched hugely on the international stage. This retrenchment looks from an external perspective to have seen the bank’s growth potential restricted dramatically because the institution has become increasingly dependent on a UK economy which was struggling even before the coronavirus pandemic hit and now has to deal with the effects of that and of Brexit.
It seemed to be the words of Ms Rose herself which intensified the focus, from a Scottish perspective, on the head office issue last week. She talked on BBC radio about Scotland being a hugely important part of the bank’s business. She spoke of Royal Bank of Scotland as a “brand”. This was in response to a question about whether Natwest was still a Scottish bank.
Her response on radio was followed by an apposite question in a subsequent call with journalists about whether Edinburgh was no longer the head office of Natwest Group and London would be formalised as its HQ.
Ms Rose said: “There is no change to our head office...if that was misconstrued, I apologise.”
While Royal Bank of Scotland’s registered office remains in Edinburgh, and we must not underestimate the importance of the employment provided by the financial institution in Scotland, including many high-level jobs, people will form their own views about where this big corporate is run from.
It was reported widely after Ms Rose was elevated to the chief executive post in late 2019 that her contract states she is based in London. A major company does, in practical terms, most definitely tend to be run from where the chief executive is based.
Of course, it is not just since the arrival of Ms Rose that the centre of gravity of Royal Bank of Scotland has apparently been shifting steadily and surely to London.
Under her predecessor Ross Mcewan, this also seemed to be the case, although it is interesting the Royal Bank of Scotland name was retained for the group when the New Zealander was in charge.
Stephen Hester, the predecessor of Mr Mcewan brought in to succeed Mr Goodwin amid the bail-out, appeared aware of and responsive to Scottish sensibilities around the head office question. However, by then of course, the UK Government had the whip hand in terms of majority ownership.
What seems clear is that, taking everything into account including Ms Rose being based in London and the recent name change to Natwest Group, the current situation in terms of where the power base is located contrasts starkly with that before the financial crisis. There was no doubt Sir George, and subsequently Mr Goodwin, were running a truly global bank from Edinburgh in the early years of the millennium.
That is not to say we should not welcome Ms Rose’s commitment to Scotland, as far as it goes, given the bank remains a very important contributor to the economy north of the Border.
It is just to recognise that the situation about which people fretted in the 1990s – that neither Royal Bank of Scotland nor Bank of Scotland would be independent institutions run from Edinburgh – looks sadly to have come to pass.
In both cases, the global financial crisis and crucially these banks’ positions at that time played a key part in what has transpired, although for Bank of Scotland the events also included sector consolidation.
In the case of Royal Bank of Scotland, in a move which could not have been foreseen in the 1990s, it was the UK Government, rather than a bigger player, which in the end acquired a majority stake and has made its presence felt.