Second Thoughts At Natwest?

It may back away from its investment banking push

Officially, Martin Owen resigned on June 16 as CEO of NatWest Markets because of a $125 million options-trading loss revealed earlier this year. But the problems at National Westminster Bank PLC's investment bank are much deeper. Its bid to become a global player has scored only minor successes. The bank is warning that first-half profits at NatWest Markets, even excluding the big hit, are likely to be "significantly lower" than last year. The profit slump is shocking in the current bull market.

The setback at NatWest could be the first big sign that banks are rethinking their rush to build up trading and other investment banking operations. In the past few years, major European banks, including NatWest, Barclays, and Deutsche Bank, have plowed billions of dollars into investment banking in the City of London with results that have been mixed at best. NatWest CEO Derek Wanless has replaced Owen temporarily and is conducting a review that seems bound to lead to retrenchment. Wanless, though respected in the City, is also under fire from shareholders. "I am intent on delivering," he says. "We have to deliver values on the businesses we have got."

PUNISHED. Other London banks are also feeling the heat. Martin Taylor, CEO of Barclays Bank PLC, is losing patience with its investment banking unit, BZW, which performed poorly last year. While they aren't losing money on trading, the startups are proving to be costly. They are trying to compete with such Wall Street heavies as Goldman, Sachs & Co. and Morgan Stanley & Co.

Even as British banks have rushed into new areas, domestic banking has turned around, thanks to a strong economy. So investors have punished the likes of NatWest while rewarding institutions such as Lloyds TSB Group PLC, which focuses on consumer banking and mortgages. Abbey National PLC, a mortgage lender that recently went public, has a market capitalization of $19 billion--not much less than the $20.5 billion for the far larger NatWest.

German and Swiss banks that have plunged into investment banking are so far not feeling as much pressure to perform as their British rivals. That's because retail banking is less lucrative on the Continent, and shareholders are less activist. But NatWest's woes are nonetheless a lesson for all the big Eurobanks seeking to create a Wall Street on the Thames.