THE ROYAL Bank of Scotland may have made a strategic error. It is far

too early to be at all certain. But its proposed sale of its

Charterhouse merchant banking subsidiary was beginning to develop rather

long whiskers and not doing too much good to its credibility either. So

yesterday's confirmation that it will receive a total of at least #235m

for the disposal of 90.1% to two European banks has cleared some of the

air.

For the past year, Charterhouse has been taking up too much management

time -- now chief executive George Mathewson can get on with the job of

developing Royal's core business of retail banking and the Direct Line

insurance arm without his having the uncomfortable feeling of having a

cuckoo in the nest. But there is the question as to whether ceding

control of what will become the first genuine European investment bank

is correct.

In the last year since a fundamental change of direction at the Royal,

the potential conflicts and different attitudes between St Andrew Square

and Charterhouse's Victor Blank were building up with the merchant

banker being much more large deal driven and with decided views on

expansion into Europe. His most spectacular operation was of the

management buy-in led by Geoffrey Mulcahy at ailing US controlled

Woolworth which, over the last decade, has emerged as one of the success

stories of British retailing scene as Kingfisher. But the continent

beckoned.

So it is with some great relief to him that Credit Commercial de

France (CCF) and Berliner Handels-und Frankfurter Bank (BHF) have

assumed control and should be able to give Mr Blank the platform he

wants. His refusal to develop Charterhouse into an all-singing, all

dancing securities house after Big Bang avoided many costly mistakes for

which the Royal owes him much thanks. But he was enviously eyeing the

opportunities in Europe where his financial skills in the less

sophisticated markets could prove highly rewarding, helping UK corporate

customers in their expansion.

The terms of the deal are necessarily complicated but in essence, the

Royal is receiving altogether #185m after allowing for a #50m dividend

it took out of the subsidiary last year in expectation of the sale being

concluded. The sum represents a slight premium over the Charterhouse net

asset value of #168m.

Although the Charterhouse Tilney stockbroking side is staying with Mr

Blank, perhaps the most salient point is that the Royal will take over

Charterhouse Development Capital's Scottish business with a #27m

portfolio of unquoted securities. That should provide the Royal with a

ready made base to build up its Scottish corporate business as the Scots

have traditionally preferred one stop banking to a greater extent than

their English counterparts. It should give the branch network greater

exposure to customer opportunities -- Dr Mathewson's career through 3i

and then as chief executive of the Scottish Development Agency partly

explains the focusing of this particular activity.

Also being retained is the Charterhouse Capital Markets operation

which contributed a quarter of the subsidiary's #23m profit last year.

However, there is a negative in that there will be a small dilution in

earnings as the return on the cash inflow with short-term money rates at

6% is less than what the Royal would have received from an on-going 100%

owned Charterhouse. But there should, in a full year, be a small

improvement of just over [1/2]% in the Royal's cost income ratio. So the

Royal's major international expansion will be through its Citizens Bank

in the US and the IBOS money transmission system where CCF is the French

partner -- BHF is a corporate bank with only 20 branches.

But that may well prove a less rewarding long-term than having

retained Charterhouse.