How times have changed in the banking sector

Apr 23 2008 by Andrew Hebden, The Journal

CAST your mind back 12 months. Adam Applegarth had just outlined his vision of Northern Rock becoming one of Britain’s biggest three banks within five years after announcing pre-tax profits of more than £587m.

A hundred miles up the A1, Sir Fred Goodwin was negotiating the £49bn acquisition of Dutch rival ABN Amro, which he believed would catapult RBS to the peak of the banking premier league. They were both confident and ambitious – arrogant, perhaps.

How times have changed for our once-untouchable banking sector.

Today Sir Fred will come face-to-face with shareholders in Edinburgh, 24 hours after the bank confirmed it is going cap-in-hand to them asking for £12bn to shore-up its balance sheet. Premium insurance brands such as Direct Line and Churchill are also likely to be flogged-off in a fire-sale. The biggest rights-issue in British corporate history has rapidly become a succession crisis which could yet (but probably won’t) claim the scalp of Sir Fred the Shred.

What Mr Applegarth is making of all this is anyone’s guess. Enough has been written about his own demise and that of his bank. But the way the vultures have begun circling Sir Fred is telling of the depth of the crisis that has overcome the banking sector.

True, Sir Fred has never been greatly loved by investors and analysts with his heavily-acquisitive strategy often coming under fire (despite the success of the NatWest deal). That the ABN Amro acquisition was only finally completed in October – by which time Mr Applegarth was already failing to steer Northern Rock away from the rocks – has only heightened that criticism. And his repeated assertion that RBS would not go to shareholders in order to raise extra cash – only to perform a dramatic U-turn this week – has infuriated commentators.

RBS is no Northern Rock and, indeed, no Citibank. It is a hugely successful business and will ride out the storm. But, tellingly, by its own admission, it cannot expect calmer waters very soon. Yesterday the bank said that it would, in future, retain more capital than previously in its balance sheet to meet the risks of default by borrowers.

That amounts to a recognition that times have fundamentally changed. The strategy of those at the top of all the leading banks must do the same.

Andrew Hebden is assistant editor (business) of The Journal.