SHARES in banking group

Halifax continued to surge yesterday in a plunging stock market, as reports that it had asked Royal Bank of Scotland to consider a merger persisted.

Significantly, Royal Bank has decided to backtrack on its original response to talk that Halifax had made such an approach.

Royal Bank spokesman David Appleton told The Herald 11 days ago that a newspaper report, which said tentative talks had taken place over dinner about a merger with Halifax, was ''totally untrue''.

But, asked yesterday whether the bank was sticking with this line, Appleton said: ''What the bank has decided to do (is) not to make any comment at all about any of this.''

He added: ''Obviously we have discussions at a high level. Our people meet the people from every bank . . . The Halifax is no different from any other major British bank in that respect. We are not making any comment about what may or may not be so.''

Referring to Royal Bank's earlier denial, one City analyst covering the financial services beat said: ''You have to be a bit careful about making denials because you can be locked out for 12 months (from doing a deal).''

Asked about the possibility of such a time-bar, Appleton replied: ''I don't know the answer to that.''

For its part, Halifax repeated its ''pure speculation'' line which by no means amounts to a denial of an approach.

The Halifax issue is almost certain to have been discussed at a Royal Bank board meeting yesterday, although Appleton emphasised such meetings ''are scheduled a year in advance and are absolutely nothing to do with this''.

Halifax shares, which rose 32.5p on Tuesday, surged another 48p to 923p yesterday as the FTSE-100 tumbled 100 points.

A spokesman for the former building society tried to pass this off as the result of heavy buying by overseas institutions ahead of

Halifax's inclusion in the 1575-company Morgan Stanley Capital International Index from the end of this week. But the price movement was interpreted by some analysts as an indication that the City would approve of Halifax linking up with Royal Bank.

Most banking analysts see considerable commercial logic in such a deal, which could create an organisation with a market capitalisation of about #32bn.

It has been reported that Halifax chairman Jon Foulds submitted a written but informal merger proposal to Royal Bank's chief executive, George Mathewson, following weeks of secret discussions between the two companies which came after the subject was first raised at a dinner in April to discuss mutual bid target

Birmingham Midshires.

Mathewson is said to have been interested but to have recently ended discussions, which could have created the UK's third-largest financial institution behind Lloyds TSB and Midland Bank owner HSBC, because other senior Royal Bank executives found the Halifax proposal unacceptable.

Some analysts believe the saga has highlighted a rift between Mathewson and Royal Bank chairman Lord Younger - said to be on holiday when the discussions began.

It has been reported that

Mathewson would have been chairman of an enlarged group based in Edinburgh, with Halifax chief executive Mike Blackburn continuing in that role and Foulds stepping down.

On City talk of a rift between Mathewson and Lord Younger, Appleton said: ''Suggestions of that kind are mischievous and completely untrue.''

But one banking analyst said: ''I think there are signs that the Press might well have put their fingers on a management that isn't quite as coherent in speaking with one mind as it perhaps should be.

''When you are talking about a chairman and chief executive not really hitting it off, it is

particularly sensitive.''

There has been speculation that Mathewson might move ''upstairs'' at Royal Bank when Lord Younger vacates the chairman's seat, probably in 2000. This would mean a new chief executive.

Any merger between Halifax and Royal Bank would, to all intents and purposes, amount to a takeover because the Yorkshire-based outfit is more than twice the size of its Scottish competitor.

But the logic of such a deal is evident. Although Royal Bank has a significant number of branches in the North-west of England and Halifax has some in Scotland, there is relatively little overlap and the pair's product ranges are also fairly complementary.

Halifax is in need of a profitable use for its excess capital and it would bring significant financial resources to a combined operation.

Royal Bank's current account customer base would be useful to Halifax, which has lost mortgage market share recently, in cross-selling its products.

Banking analysts believe there is still a possibility of a deal between Halifax and Royal Bank.

One, who declined to be identified, said: ''It is entirely down to the personalities involved . . . If I can put it this way, the egos at the top of the Royal Bank have never been known to be small.

''It is, I think, going to depend entirely on what sort of deal they can hack out between them, so honour is satisfied and they are all happy with it.''

Asked his opinion, John Tyce, analyst at SG Securities, said: ''Your guess is as good as mine.''

Shares in Royal Bank started higher yesterday but ended 5p lower on 1025p.

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