ROYAL Bank of Scotland's growth strategy was put under the microscope yesterday when broker Cazenove marked down the group's share price prospects.

Chief executive Sir Fred Goodwin's apparently wellearned reputation for cost-cutting was also called into question by research showing that the bank's core staff costs have grown more quickly than income over the last four years, adjusting for the impact of acquisitions. Organic income has risen 7% per annum, the broker calculates, but staff costs have grown by 8% to 9%.

Cazenove expects Royal Bank to remain on the acquisition trail, pointing out that management will have become accustomed to seek productivity improvements through integration savings rather than tackling the existing cost base.

The broker expects the bank to consolidate this year as its rebuilds capital ratios, but predicts a return to purchase mode in 2006, as the benefits from businesses acquired in 2003 and 2004 - First Active, Churchill and Charter One - mature.

Downgrading the stock to "underperform" from "in-line", the 19-page note stated: "Organic income growth has been accompanied by surprisingly strong growth in employee numbers of 4% per annum (net of post-integration job losses).

When allowance is made for wage inflation, we estimate the growth in underlying staff costs has exceeded income growth in the last four years. This excludes the rise in pension costs."

Last year Royal Bank made a [pounds]750m one-off payment into its non-contributory final salary pension scheme and raised its contribution rate from 6.8% of pensionable salary to 21.5% following its latest triennial review of the scheme. The scheme remains open to new members.

Cazenove added: "With the likelihood of a slower economic background, combined with RBS's high market shares in most UK sectors and staff costs at a relatively high percentage of total expenses (58%), the prospects for underlying profit growth are muted.

"Indeed, our concern is that operating management may have become conditioned to expect a combination of acquisitions and strong income growth to outweigh the growth in staff expenses. Without acquisitions, it is more difficult to restrain cost growth in a slower revenue environment."

Cazenove said it is more likely that management will continue to pursue acquisitions rather than change strategy, but added: "The risks under either scenario will weigh on the valuation."

RBS shares closed 12p lower at 1741p.