LONDON, June 7: A rumoured merger between British banks National Westminster Bank Plc and Abbey National Plc would offer both a great opportunity if it were to materialise, analysts said.

Rumours of a merger circulated all week, following a British newspaper report on Sunday which said NatWest, the larger of the two, had approached Abbey National.

Neither has confirmed talks took place, although a senior Abbey National executive admitted it does talk to other firms "from time to time".

Both Abbey and NatWest declined to comment on renewed rumours, which caused shares of both companies to rally strongly.

Ian Harley, Abbey National's finance director, told Sky television that while the rumours were interesting, they were "hardly surprising in a market-place which has been so frothy for the last 12 months".

But while unwilling to predict whether or not a merger would really go ahead, analysts said it would make perfect sense given the inevitable consolidation in British banking and the need for economies of scale.

"The logic is excellent, it fills the product gaps in both banks," David Townshend, banking analyst at Goldman Sachs, told Reuters.

Townshend stressed he was talking in hypothetical terms and was not giving any credence to the rumours, but such a move would offer a rare opportunity for synergies.

Abbey National's strong mortgage presence as the UK's second largest lender and NatWest's strengths in areas such as small business lending, credit cards, current accounts and unsecured lending would create a major banking force.

"It may just be idle talk in a quiet market, but NatWest has got a lot of upside if a deal goes through," said one senior equity salesman.

"There is a lot of potential cost-cutting between the two and it could bring NatWest closer to the rating of Lloyds TSB Group Plc," he added.

Another analyst, who declined to be named, said a merger between NatWest and Abbey would not come with the same goodwill as Lloyds did when it merged with TSB.

He pointed out there were serious concerns about NatWest's investment banking operations and the costs involved in its drive to build up this volatile business as well as worries about NatWest's retail banking.

"It would be a rebalancing of investment banking, where there are worries about earnings growth," one analyst said.

In March NatWest Markets, the bank's investment banking arm, announced a loss of 90 million pounds ($146.3 million) as a result of systematic mispricing of interest rate options.

The loss was an embarrassment for the firm and resulted in NatWest markets chief executive Martin Owen waiving his bonus in recognition of his overall responsibility.

Four senior employees were suspended and millions of pounds in bonuses withdrawn and a full report on the episode is expected to be completed later this month.

Analysts stressed for a marriage between Abbey and NatWest to go ahead it would have to be the result of an agreed merger as a hostile takeover would not be an option for NatWest, not only due to the loss of goodwill but also because it could not afford to.

"The whole thing has to be based on the agreement of top management," the second analyst said. But some raised doubts as to whether Abbey National's top managers would want to risk being swallowed up by NatWest.While the two banks had the opportunity to establish a strong retail network, they would be well advised to maintain their own brands, in the same way as Lloyds and TSB have done."They could maintain their distinctive brands but run them from the same back office," he added.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.