Tesco director Andrew Higginson said credit crunch 'must have' led to disposal of stake in bank.

Tesco director Andrew Higginson said yesterday that Royal Bank of Scotland's desire for capital amid the credit crunch "must have been a factor" in the supermarket chain having the chance to buy out its banking partner's 50% stake in their personal finance joint venture for £950m in cash.

The well-trailed purchase of Royal's stake in Tesco Personal Finance - which the Edinburgh-headquartered bank said would bring it a £500m gain on disposal - was confirmed yesterday by the pair.

Tesco highlighted its ambition to build a "full-service retail bank".

Higginson highlighted a particular appetite to take significant market share in the current account arena. He also emphasised ambitions to expand Tesco Personal Finance internationally, seeming to see potential in the likes of Ireland, Hungary, Thailand, South Korea, Poland, and the Czech Republic but indicating the US was not on the agenda.

He flagged the success of Tesco Personal Finance's "trial branch" at the Silverburn shopping centre at Pollok in Glasgow, as he highlighted scope to build out the operation's physical infrastructure as well as its internet and telephone-based business.

Benny Higgins, who departed as head of Bank of Scotland and Halifax owner HBOS's retail banking business last year, meanwhile revealed yesterday that he had been working with the supermarket group on the purchase of the Royal stake in Tesco Personal Finance since "around the turn of the year".

Higgins, who headed Royal's retail banking business before joining HBOS and sat on Tesco Personal Finance's board between 1998 and 2006, has been hired by the supermarket group as chief executive of Tesco Personal Finance.

Higginson is moving from being finance and strategy director of Tesco to become chief executive of the supermarket group's "retailing services" business, which also takes in telecoms and "internet/home shopping". He will retain his group strategy role, and Tesco will seek a new finance director.

Pressed during a conference call with journalists on whether Tesco's efforts to buy its partner out of the personal finance joint venture had been helped by Royal being keen to do a deal, given banks' exposure to the global credit crunch, Higginson replied: "We started them (talks) nearly a year ago last autumn."

However, he added: "It must have been a factor in us having an opportunity to buy out the bank."

Higginson went on to say that Tesco's acquisition "must have been helped by the fact that Royal were looking to raise some capital".

Asked by The Herald if Tesco had at any stage before last autumn approached Royal about buying out the bank's stake, Higginson said it had not.

He added that Tesco had a strategy conference every November and had, in March last year, "started the work" on its services business.

Higginson said there had been a "conversation with RBS around the autumn-time last year".

This had started off as a conversation, between Royal chief executive Sir Fred Goodwin and Tesco chief Sir Terry Leahy about the "next phase" for Tesco Personal Finance.

Higginson added that it had become clear that Tesco Personal Finance had to be more important to one partner than the other and, given its branding, it "had to be us".

Tesco Personal Finance made pre-tax profits of £206m last year and is expected to make more than £240m in 2008. It has been built from a standing start in 1997 and is a stand-out success story in the supermarket banking arena. Its products include motor, home, pet and travel insurance, savings accounts, credit cards, and personal loans, and it has 5.5 million customers.

Higginson noted Tesco Personal Finance, in its entirety, would on this basis account for more than half of Tesco's near-£400m of annual profits from services, as opposed to its dominant retailing business.

He highlighted ambitions to raise this to £1bn in "the next few years", and envisaged banking would still account for more than half of this larger number.

He was open-minded on whether Tesco entered the mortgage market - shrugging off any suggestion that it would be prevented by any worries about reputational damage if it were to repossess people's homes.

Higginson said about 200 employees of Tesco Personal Finance, mainly at this business's Edinburgh head- quarters but also at Redhill in Surrey and in Ireland, would transfer to the supermarket group's payroll.

In addition to these people, a significant number of Royal Bank staff service Tesco Personal Finance through the likes of call centres, account establishment and management, card issuance, back-office processing, and collections and recoveries.

The supermarket group and Royal have signed contracts which will see the Scottish bank continue to provide services to Tesco Personal Finance's general and life insurance, cash machine, banking and Tesco Compare operations for between two and seven years, with the duration varying according to product line.

Higginson said Tesco could thereafter build its own platform for particular products. It could also continue to outsource some activities to Royal and look at using other banks as well.

He said there would be no redundancies among the Tesco Personal Finance staff transferring to the supermarket group, with growth targeted, and added that the business would remain headquartered in Edinburgh.

The implications of the deal for the staff who support Tesco Personal Finance and will remain with Royal would seem likely to depend on what the supermarket group decides in coming years on outsourcing support ser-vices, and on the Edinburgh-headquartered bank's overall personnel requirement.

Royal is, meanwhile, trying to sell its RBS Insurance business, which includes Direct Line and Churchill and has significant dealings with Tesco Personal Finance. Tesco said the service agreement for insurance was protected in the event of such a sale.

Higginson tried to brush off the suggestion that his appointment as chief executive of Tesco's services business might signal he was being groomed to take over from Leahy at the head of the supermarket giant.

He said: "As I always say on these things, he (Leahy) is a lot younger than he looks. I don't think that is really in the picture. It has always been my aspiration to move into general management on a more full-time basis."

Asked if his move was aimed at keeping him on board at Tesco, in case he received more exciting offers, Higginson quipped: "Not that I have heard. If you do hear anything, do let me know."

Leahy said: "Services are bigger and faster-growing markets than food."

Iain Clink, said by Higginson to have been chief executive of Tesco Personal Finance during six of its most successful years, is rejoining the business as finance director. He had, until recently, been head of cards and direct finance at Royal. Clink headed Tesco Personal Finance from 1999 to 2004.

Tesco's acquisition of Royal's Tesco Personal Finance stake, which is subject to Financial Ser-vices Authority approval, is expected to conclude in the fourth quarter.