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InterviewsApril 1 2001

Right, said Fred, both of us together

Karina Robinson talks to Fred Goodwin, group chief executive, Royal Bank of Scotland.
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Fred Goodwin wanted a Triumph Stag. He got it. Fred Goodwin wanted National Westminster Bank. He got it.

It’ll be interesting to see what the youngest group chief executive of a UK bank next sets his sights on.

Integrating NatWest with Royal Bank of Scotland looks set to keep him busy, but for less than the three years originally envisaged, as benefits have come through faster than expected, although the bank has not changed its original forecasts.

“In the first year we are significantly ahead with cost savings of £653m versus a target of £550m,” he says. “We are on track to deliver promised revenue benefits of £390m and costs savings of £1.3bn in 2003.”

One of the reasons for the speed of the cost savings is that 13,000 jobs have already gone, with another 5,000 to go to fulfil the promised number.

But Mr Goodwin insists this has not affected morale unduly as NatWest’s defence made clear 15,000 jobs would have to go anyway, the job market is relatively favourable and staff know they are now part of a growing group.

As a result of all this, the 60% proforma cost/income ratio is down to 53.8% in the first 10 months of the merger. The bank wants it to be in the low 40s.

Although Mr Goodwin says he is not offended by his nickname (“Fred the Shred”), first used in the Glasgow Herald by a long-standing acquaintance, and that it was useful in bolstering his credibility when promising to cut costs at NatWest, he loses his sense of humour when that is portrayed as his only management strategy.

“Our objective is to grow income, to grow value for our customers, shareholders and staff,” he says. Although he does not rule out another UK acquisition, the bank’s current market share makes a large one unrealistic.

It is the UK’s number one corporate bank and the number two in retail. Ramping up in-house capability in areas ranging from mortgages to car insurance might be a better strategy. In the corporate sector, Lehman Brothers said in a report that the bank might want to “broaden the existing investment banking capability from largely debt into equity and equity-related product.”

However, Mr Goodwin says he would then have to hire “a different sort of people”, by which he means highly-paid investment bankers. He obviously feels strongly about them.

When challenged on his £814,000 bonus for the £21bn acquisition of NatWest – critics say it should surely be for implementing the deal – part of his answer was to refer to “people in any wine bar in the City of London who are getting more”.

On a less flippant note, he says “It was a significant achievement, it should not be dismissed so lightly. NatWest was double our size, the financing structure for it was unique. And it was the biggest ever hostile financial services transaction of its type.”

It certainly forced Mr Goodwin, who had been in the shadow of Sir George Mathewson, now executive deputy chairman, out into the open as he sought to convince the financial community of the bank’s case.

They met him through 200 investor presentations, of which he says it was “difficult to remain civil, and I’m not sure we did, as people were asking the same questions”. He sold them the story, and then himself. “He can do no wrong,” says Colin Hector, analyst at Lehman Brothers. But City love affairs can cool quickly.

Mr Goodwin will have to keep on delivering high growth and, with constraints in the UK, that probably means overseas. RBS’s US operation, Citizens Financial Group, is the second largest bank in New England with its acquisition of State Street’s commercial banking activities and UST Corp., and could probably be expanded.

“The focus is turning to areas in contiguous states where we could use the Citizens formula. But we want to see prices [of regional banks] come down a little bit,” he says.

He is not worried by a deterioration of the US credit picture on the back of the economic slowdown. But then a man who was chief operating officer of the worldwide liquidation of the discredited Bank of Credit and Commerce International (BCCI) in his guise as an auditor at Touche Ross, does not need lessons in doubtful loans.

He won’t elaborate on this fascinating experience, only saying that it taught him how to deal with challenges. It also, according to a colleague who worked on it with him, led to an increase in his tie collection as they agreed to exchange gaudy ties from the hotel shop each time they surmounted another mountain in the BCCI negotiations.

The other area of possible expansion is Europe, where RBS has an alliance with Spain’s BSCH, France’s Société Générale and Italy’s San Paolo IMI. In fact, BSCH is the bank’s largest shareholder with 10% from paying £1.7bn in March 2000 for new shares in order to help buy NatWest.

In December 2000, RBS repaid the favour, helping boost BSCH’s capital following its acquisition of a Brazilian bank, Banespa. The alliance has lead to other, unexpected cross-pollination: BSCH’s co-chairman Emilio Botín recently got the bit between his teeth about cost-cutting, haranguing his bank’s top managers about the need for cost-savings, which Mr Goodwin says comes from the Spanish banker seeing RBS’s latest campaign emphasis.

However, the current regulatory and legal frameworks mean no big cross-border acquisitions are in the offing in Europe. “I don’t see us wandering out and buying SocGen! “ exclaims Mr Goodwin. “It’s about getting on with [smaller] things.

In Europe, now there is more harmonisation of items like consumer credit and credit cards. And there is more acceptance by Europeans of foreign providers of structured finance, private finance initiatives and acquisition finance.”

Other than in its battle for NatWest, RBS was in the UK news last year when its withdrawal of a £22.6m loan in January nearly caused the close down of Huntingdon Life Sciences, which experiments on animals for the pharmaceutical industry, because staff and customers had been threatened by violent animal rights activists. Jack Straw, the home secretary, told Parliament that both RBS and Barclays (which also had outstanding loans) would have squealed “if as a result of their pusillanimous approach, part of our scientific base and therefore their financial income, was to be reduced.”

He suggested they had neglected “their wider social and business responsibilities.” For the first time in the interview, Mr Goodwin looks distinctly uncomfortable. “The situation put us in a difficult position as we don’t discuss customer affairs in public. I can live with the home secretary saying it but not myself if I disclosed anything,” he said.

He also does not disclose anything about his private life, other than his boyish hankering after a Triumph Stag. “I bought cars to restore so I could always have a better one than I could otherwise afford,” he says.

That lesson definitely hit home. Both NatWest, an underperforming UK bank, and Citizens, a distressed bank, could be said to have been bought to “restore”.

He also reorganised in 1985 – what he calls his first professional challenge – the Rosyth Royal Dockyard. Then, in 1990, he helped ready Short Brothers, the largest industrial employer in Northern Ireland, for its subsequent privatisation.

His formula for dealing with tests is to put together a team of people, have a shared view of the challenge, come up with a shared plan, allocate the tasks, “get on with it and don’t deviate”.

“It sounds trite but it is what we are doing with NatWest,” he says. He did the same at Clydesdale Bank and Yorkshire Bank, owned by National Australia Bank, his first move to running a financial services firm. The opportunity came up as a result of his helping Clydesdale to buy Yorkshire in his accounting role.

Afterwards, working in London at the time, he received a phone call and accepted the job immediately, based on his “5-second rule” which says your first instinct will be the right one.

From there he was poached to RBS and crossed the great divide from West to East, breaking the taboo on top management from Scottish banks moving between Glasgow and Edinburgh, let alone the social stigma of a Glaswegian going to live in stuffier Edinburgh. However, as Chairman of The Prince’s Trust in Scotland – reorganised into a more devolved model by him – it sounds as though he has become part of the Scottish establishment.

Mr Goodwin also sees the bank’s growth coming from more mundane organic growth and joint ventures. Already, the bank has joint ventures with food group Tesco and Virgin Direct, among others, and it has a bancassurance partnership between CGNU, Royal Scottish Assurance and National Westminster Life Assurance. It also owns Direct Line, the UK’s largest motor insurance underwriter.

The bank is dealing with the latest trend – catering for the mass affluent – through NatWest and RBS private banking. It is working on developing wealth management products which could benefit from economies of scale.

For those with a bit more money, there are Coutts, Drummonds and Adam & Co – long-standing private banks. This multi-brand, multi-channel approach has proved successful in the last few years. But the paradox in financial markets is that the better you perform, the higher the expectations.

By 2005 at the latest, having absorbed and turned around NatWest, RBS will have to find its next acquisition. Mr Goodwin may say he still feels like a chartered accountant – and he may look like one, if a rather boyish one who is better-looking in person than in photos – but his attitude is that of an aggressive banker. “[In the battle for NatWest] we pushed hard till we were over the line. We did not spend any time wondering ‘are we going to lose’, rather it was ‘are we going to win’,” he says.

At 42 years old, he is at the right age for many more years of winning.

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