Fred's American master plan

A SHIVER normally runs down the spine when one learns of a British bank going West. Visions come to mind of Midland (now HSBC) and its disastrous adventure with Crocker, and of NatWest's ill-fated venture in North America, which cost shareholders billions.

But one has to have some faith in Royal Bank of Scotland. It is daring to go where others - including Lloyds TSB - feared to tread. Among the reasons for its expansion is that it has few other choices.

Bolt-on acquisitions in British finance can be done, but in most markets RBS - like Tesco in supermarkets - is barred from further big buys by competition rules.

So it has to set its sights more internationally. Indeed, not only British banks, but some European banks like Santander, increasingly are seeking to break out of their national boundaries.

Over the years RBS under the direction of its US chief Larry Fish (see below) has carefully forged a series of mergers on America's eastern seaboard into a coherent whole.

By and large it has not overpaid for its acquisitions and as far as one can tell, financial controls are in much better shape than at Allied Irish when it had its local difficulties at Baltimore-based Allfirst.

Nevertheless, it is as well to remember that America, like Britain, has been on one of its periodic borrowing binges, encouraged by low interest rates.

When borrowing costs do rise, bad debts could start to climb. That, however, could be more of a worry for HSBC and Household, with its sub-prime lending, than for RBS and its new acquisition Charter One Financial.

Fred Goodwin's venture takes his American arm Citizens deeply into the Midwest, including cities such as Chicago, Detroit and Cleveland. Charter has an extensive network of 600 branches, including 160 in supermarkets.

This is at a time when there has been a reaction against internet and other electronic forms of banking in the US and many big players - including Citibank - have been building and opening new branches.

RBS has good experience with acquisitions, having taken a billion or more of costs out of NatWest since it acquired it for £21bn in 2000.

This time it is financing the deal with its own paper and through a hefty placing of shares to the value of £2.5bn. RBS claims it is not overpaying at a price of 15 times earnings.

But investors must be aware that if Goodwin and company are serious about North America, this cannot be the end of the story.

Compared with the giants Citibank, Bank of America and JP Morgan Chase, RBS is no more than a bit player. If it wants to be a price and brand setter in the United States, the capital commitment will have to be ever larger. Shareholders need to be prepared for more deals and more dilution.

City bonanza

THE big investment banks are rubbing their hands with glee at RBS's new American plaything. UBS, Merrill Lynch, Goldman Sachs and Lehman Brothers are set to collect an estimated £25m advisory fees for their work on the deal.

The increased volume of takeover activity - together with the surge in the stock market - is starting to have a dramatic effect on the London and City economies.

The CEBR, headed by economist Douglas McWilliams, is expected to lift its forecast for London and City growth following the financial sector recovery.

McWilliams' new projections will show City growth climbing 5.3% next year, against a previous forecast of 5.1%, as big takeover deals start to kick in again. As a consequencethe number employed in the City is expected to return to its pre-downturn high of 325,000 next year, rather than in 2006. It could reach 350,000 by 2008.

The forecaster also believes that City bonuses will jump by a further 30% this year.

Why should any of us care about large numbers of flash traders in the Square Mile and Canary Wharf doing so well? The main reason is that the City is a huge contributor to growth, chipping in around 7% of gross national product.

Indeed, one of the reasons that Gordon Brown's revenue projections have fallen short over the last couple of years was because jobs were being shed in the financial sector and there were bonus cuts or no bonuses at all.

If the Square Mile is really on the way back, there must be the possibility that some of the tax rises predicted for after the election could be avoided - so long as the extra money is not paid in stakes in silver mines to avoid the Revenue's secret police.

City fat cattery may not be such a bad thing after all.