18 May 2007

RBS's $133B vis-a-vis RBC's $69B Market Capitalization

The Globe and Mail, Eric Reguly, 18 May 2007

The takeover battle for ABN Amro, the biggest financial services contest in European history, is stuck in the mud. What a mess. Barclays has agreed to buy the Dutch bank. A consortium led by Royal Bank of Scotland -- better known as RBS -- is threatening to upset the merger. The whole thing is tied up in Dutch commercial court and a group of investors has filed criminal complaints against ABN, accusing it, among other nasty things, of leaking market-sensitive information.

By now it's clear that ABN's new owner will not be determined for months, and maybe not until early next year. This does not seem to bother RBS. It didn't become the second-largest bank in Europe (after HSBC) and the fifth largest in the world by shrinking away from deals that ranged from the ambitious to the apparently hopeless. Compare this to the Canadian banks, who almost never met a deal that didn't make their CEOs and directors wet their pants.

The Canadian banks are well managed, highly profitable and generally well liked, if not adored, by investors. But global players they are not. When a tiny wannabe country like Scotland - population five million - can upstage a G7 country with more than six times the population and several dozen times the economic clout, you know there's something wrong with the way the Canadian banks have been run.

RBS was founded in 1727 by royal charter of King George I (a year later, incidentally, it became the first bank to offer an overdraft facility). From the outset, RBS seemed to realize domination of little Scotland was a feckless goal - there was a whole world out there. It never shied away from hostile takeovers and was not even afraid to buy companies bigger than itself. Today its market value is equivalent to $133-billion. Winning ABN would add more than $95-billion to that figure, though RBS's main goal is to bag ABN's LaSalle bank in Chicago and unload the rest. By comparison, Royal Bank of Canada, the Big Five leader, is worth about $69-billion.

RBS spent the 1800s buying other Scottish banks. It then expanded south into England. The English didn't take kindly to the rude intrusion and insisted on an agreement that prevented Scottish and English banks from opening branches in each other's territory (RBS did manage to acquire a few small English banks). Remarkably, the pact held until the 1960s. Since then, RBS has been making up for lost time.

By the late 1970s, RBS was big enough to attract attention. A takeover attempt from Lloyds Bank was fended off. The proposed merger of RBS and Standard Chartered died when HSBC spoiled the deal. But HSBC could not get antitrust approval to buy RBS. Never mind - RBS turned its attention to the U.S., where it bought Citizens Financial Group and later, Charter One, to become one of the top 10 banks in the American market.

RBS grew bolder. In 1999, it triggered the biggest takeover battle in British history when it competed with rival Bank of Scotland for NatWest, which was then one of the four biggest English banks. RBS's hostile offer won. The victory shocked the global banking industry, because NatWest was much larger than RBS. Here was a bank that was lucky or knew no fear, or both.

RBS, now led by Sir Fred Goodwin, has made mistakes. The Charter One purchase in 2004 was highly expensive and shareholders packed Sir Fred into the doghouse. He was let out in April to smash the Barclays-ABN merger plan. ABN is a big bite even for RBS. The plucky Scots showed imagination by recruiting Fortis, a Belgian-Dutch bank, and Spain's Banco Santander as buyout partners.

Things looked bad for RBS when ABN agreed to sell LaSalle to Bank of America for $21-billion (U.S.). The Dutch courts came to the rescue and ordered that the LaSalle sale be put to shareholders for approval. ABN is appealing the decision, meaning the sale of ABN is not imminent. The RBS consortium says it's willing to pay a higher price than Barclays and may launch a formal offer soon.

To RBS, the Dutch bank and its Chicago subsidiary are "once-in-a-lifetime" opportunities. That doesn't mean much, because RBS seems to treat everything as a once-in-a-lifetime opportunity. Pity the Canadian banks, which have not been able to crack the global top 20, didn't feel the same about their expansion opportunities.