Banking in the UK, together with (ironically) pharma and tobacco, are consistently the top 3 most profitable sectors over most time horizons. But this year, despite earning forecasts generally holding steady, banks (on both sides of the Atlantic as it happens) have suffered a price derating in a rising interest rate environment.

This turn has brought a premier bank like RBS, for example, to the point where it forward yields 5.4% and sells on a earning multiple of less than 10 dropping to under 8 on forecasts. And yet it is still willing to be party to a deal paying 20 times forward earnings for the distinctly ordinary ABN Amro franchise. It is implicitly telling shareholders it can simultaneously grow and cut its bit of the purchase beyond the profitability point despite the impressively high price.

RBS performed this feat with its Nat West purchase in early 2000. But this time there is no obvious domestic overlap where nearly 20,000 jobs can be shed. Its targets look wishful; and without LaSalle as part of the deal the strategic benefits do not seem compelling.

Its consortium partners, largely out of focus in the UK press, appear better placed. Fortis, especially, is pursuing a company transforming deal and wants the core Dutch network where it might be able to do a Nat West. And Santander is after ABN Amro’s Brazilian ops where probably it would do better than Barclays given its existing franchise there. In fact, it is curious, given their relative strengths in Brazil, that Barclays has not tried a divide and rule tactic to beak the opposition by conceding a sale and dealing directly with the Spanish. Or maybe it has/is.

Meanwhile, a rival bid is supposedly in the offing from Citigroup, Banco Bilbao and ING* - a team bearing an uncanny resemblance to the RBS consortium. Oh, to be an ABN Amro equity holder.

In contrast, institutional cross holders in the various bidders must be somewhat concerned. Possibly all the more so with the potential for further rate rises sparked, perhaps, by inflation data appearing over the next couple of days with the US numbers. That would raise financing costs, unbalance the deal’s value assumptions and make banking operations less straightforward and profitable.

Doomsdayish? Maybe. But all in, it is not looking a bad toss to lose for RBS shareholders.

*source, with a pinch of the proverbial, is Dow Jones (13 July) citing German financial newsletter Der Platow Brief. Citi would not comment; and BBVA & ING "weren't immediately available to comment" either.

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  1. Charles Butler // 7/17/2007 09:31:00 PM

    Rumours flew about a couple of weeks ago that BBVA was being targeted by buyout money from Mexico, of all places. Might be time to fatten up, regardless of the price.


  2. Charles Butler // 7/17/2007 09:52:00 PM

    Oh, forgot to mention how vanguard you are - not a word yet of that in the local press.


  3. RJH Adams // 7/18/2007 12:38:00 AM


    from DJ news wires (13 July), covering a report in one of the German financial newsletters(Der Platow). Whether it's true or not, time will tell.


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