For Subscribers

Get the complete article now!

TWST: Can you take me through the investment case; is it a valuation story, or a traditional banking tale of acquisition-based cost cutting? What are the principal elements that would convince an investor to agree with you?

Mr. Thomas: The background is obviously the NatWest (LSE:NWB_PA.L) acquisition, which has given Royal Bank (LSE:RBOS.L) a period of maybe three to four years in which you would expect to see significant earnings growth on the back primarily of cost-cutting but also actually of revenue enhancement. We believe that the NatWest franchise was under-leveraged, was not being managed as well as it could have been, and Royal Bank as a much more entrepreneurial entity is now reinvigorating that franchise. That is a large part of the story here; it’s not just about cost cutting. That reinvigoration of the NatWest franchise in the UK should lead to some significant revenue upside as well as the possibility of some cross selling between the two customer bases. So what the market is neither really looking to, nor pricing in, is the potential for revenue enhancement.

TWST: Which of the areas do you anticipate the group can grow most rapidly over the next 18-24 months?

Mr. Thomas: Actually the company is pretty positive about developments on all the divisions at the moment, which is quite unusual. There’s clearly a lot of upside in an area like wealth management, and asset management offers scope for higher customer penetration, particularly in NatWest.

TWST: In the past, asset management at Nat West would have been handled by Gartmore, is that right?

Mr. Thomas: Wealth management is a broader business, which includes retail fund sales and the like.

TWST: So how will the asset management operation be developed following the exit from Gartmore?

Mr. Thomas: The most important element of this is bank assurance sales and retail fund sales to the retail customer base, and NatWest Life is the brand at NatWest. Royal Bank has a joint venture operation and agreement with CGNU (Paris:5662.PA). We think that NatWest Life was an underperformer; we think there’s potential to enhance that quite significantly in terms of the level of penetration with the huge customer base that they’ve got.

TWST: Within the corporate banking and capital markets divisions, are there any concerns about TMT exposure for the enlarged group?

Mr. Thomas: This is something that the market’s been asking companies about. This is a company that’s very relaxed about their exposure. They do have exposures, very small to high yields, larger to telecoms, but predominantly to the big names that we believe are quite secure.

TWST: When you look at the larger TMT names and estimate the credit risk and debt cover, is it their cash generation that enables you to assert that they are so secure?

Mr. Thomas: Yes; it’s cash generation and franchise value. There are some of the bigger entities who are going to have to undergo some restructuring because they’ve taken a lot of debt, but we wouldn’t anticipate that larger telecom companies with big customer bases are going to suffer from serious cashflow problems.

TWST: Can you comment on what changes have been made to, and give me your assessment of, the management structure of the enlarged group? Who is the driving force?

Mr. Thomas: Fred Goodwin’s been in the driving seat for the last year. We believe that Fred Goodwin is really one of the outstanding CEOs in UK banking, if you like, the outstanding CEO. He has an unusual ability to look at the big picture and keep a grasp on the detail.

TWST: Putting the bank in the European context, what are its plans to grow beyond the UK, has it got European or even global vision and ambition?

Mr. Thomas: The bank was relatively small before the NatWest acquisition when you look at the European stage or global stage. They did own Citizens in the US, which is a regional bank in New England. We think now, with the NatWest deal under its belt, this bank, which is actually now the third largest bank in Europe by market cap, will be looking to expand internationally. It is certainly looking to expand Citizens, if opportunities come along to grow out of the New England area into states like New York or New Jersey. But also I don’t think you can discount a European strategy longer-term. This is now a big bank with the potential to play on a much bigger stage.