A rich bank with more to come

WE SHOULD all be grateful, one supposes, for the brilliance of Royal Bank of Scotland in lifting pre-tax profits 28% to £4.2bn. Better a rich bank than one seeking new capital. RBS has been true to its word in delivering cost cuts from the takeover of NatWest. Costs as a proportion of income are down sharply from 53.5% to 46.9%. As jobs are shed and integration tightened, the benefits coming through to the bottom line have surged. Last year they climbed £300m to £2bn and the bank promises more to come.

NatWest has turned out to be even richer pickings than many of us suspected. In the United States, RBS has been able to do much the same as it integrates its Mellon purchase into Citizens. AIB's Allfirst offshoot in the US would be a useful contiguous acquisition, although RBS appears to be dampening down hopes of this.

At some point the group will have to address organic growth. How that is going to happen when customer service standards and management rigidities at its NatWest branches are so appalling is hard to imagine. It is a bank which has difficulty in opening up a student account without getting it wrong and then fining the young person for the privilege of suffering its own mistakes.

In a world when newer players like Intelligent Finance, part of rival HBOS, are able to offer ordinary customers the most sophisticated products, sweeping up savings balances nightly to offset mortgage interest charges, a bit of investment in NatWest systems and people might be more valuable than wielding the knife.

One area where expenses have not been trimmed is provisions, which go onwards and upwards at £991m. Given the loan losses at the US banks and fears about the deterioration in lending portfolios at home, this is a relatively modest figure. Nevertheless, the reluctance of RBS to quantify any Enron exposure does not enhance its reputation for openness. But after a tripling in the shares in five years, investors are unlikely to complain too loudly.

Insurance contrasts

EVEN given the volatility of the insurance cycle, the results from Royal & SunAlliance are incredibly bad. If one wanted to be kind, one might note that group operating profits were £16m. But this figure was quickly swamped by the biggest series of write-offs seen since Marconi's results.

Of course, this was not a good year for any insurer. The problem for RSA is that it appears to have more exposures than almost anyone else. In addition to large provisions for asbestos claims, dating back many years, it has taken hits from the World Trade Centre and Enron. Add the volatility of the stock market and the small profit becomes a whacking £1.3bn loss.

The real concern must be that pressure on its capital will be so strong as to prevent it from doing the volume of business it needs in the current year, at much improved rates. If all the bad news is truly out, there might even be a case for a takeover, with the buyer reaping the benefits of higher premiums and an eventual stock market recovery.

The contrast between RSA and Legal & General could not be greater. The latter, under David Prosser's leadership, took the opportunity in 2001 to strengthen its capital base because of the difficult times in the equity markets. L&G also steered clear of the higher yielding bonds which caused problems at the Pru, and would have made a hefty pretax profit but for a reshaping of the balance sheet.

L&G looks well placed to take advantage of the rundown in defined benefit pensions as companies make new arrangements. It has already been successful in attracting stakeholder groups. On the broader canvas, it sees its strong brand as valuable when banks sell a range of products instead of just their own.

For small savers sitting on losses as a result of equity underperformance, Prosser has a confident message. Continuing to buy units on a regular basis when markets are low is the best form of investment. That is, aside from L&G shares.

Goodbye GEC

ONE of the brilliant decisions taken by Lord Simpson and John Mayo during their heady days at Marconi was to quietly sell the General Electric Company name, with a pedigree dating back to 1889, to Jack Welch's General Electric in the United States.

What may be more disturbing for Marconi shareholders is that the price for this transaction has never been revealed and that other potential buyers, including Siemens, which was interested, never got a look in. This was hardly in keeping with Mayo's mantra of shareholder value.