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The state of RBS: a ghost of banking past

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Just been reviewing the results of Royal Bank of Scotland and, unsurprisingly, it’s the ghost of banking past.

Royal Bank of Scotland (RBS) has reported its sixth annual loss since it was rescued by the UK government in 2008.  The bank's pre-tax loss for 2013 was £8.2 billion  (£5.28 billion in 2012).  However, excluding bad bank and legacy costs, RBS made an operating profit of £2.5 billion.  The bank's cost-to-income ratio currently stands at 73%, but RBS has set a target of getting this down to about 55% by 2017.

Ross McEwan, the new Chief Exec, is front-loading his first set of results with a mass of stinkers including:

  • £3.8 billion of legacy litigation, conduct and regulatory costs including:
    • £1.9 billion to cover mainly US action over mortgage-backed financial products,
    • an extra £465 million to payment protection insurance (PPI) compensation,  
    • £500 million for mis-selling of interest rate swaps to small businesses, and
  • bad debt write downs of up to £4.8 billion in the creation of an internal  “bad bank” to wind down toxic loans called  RBS Capital Resolution (RCR).

They also issued a public statement talking about how the bank "will be a smaller, simpler and smarter UK focused bank that puts the needs of its customers at its core", along with a more detailed letter to shareholders.

To back up this commitment, the bank has publicly stated that:

  • We will stop offering different rates to customers online or in branch. Customers should be able to bank with us in the way that is best for them and not pay more for doing so
  • We will stop offering deals and products to new customers that we are not prepared to offer our existing customers. We have banned teaser rates on any product. This means, for example, that we will no longer offer 0% balance transfers for credit cards. These changes will start from mid-March
  • We will put hundreds of business bankers back on the high street in our branches to help small businesses open accounts, apply for loans, and get the help they need
  • We will stop confusing our customers with complicated language they cannot understand. By the end of this year we will be able to explain all of our personal and SME charges on one side of A4 in simple language
  • By the end of this year we will halve the number of personal and SME products on offer. We will make it easier for customers to choose a product that suits their needs best, rather than the needs of the bank
  • We will make all but the most complex small business lending decisions in five days, not five weeks
  • We will cut how long it takes to open a personal current account from five days to next day by the end of this year. Last year we reduced the time it takes to get a debit card to three days. And now, by the end of this year, you will have access to Mobile Banking and Online Banking within one day. We will also improve the process to open a personal current account online so customers can upload their identification, such as their passport, and open their entire account from home

Nevertheless, the bank has lost a total of £42 billion since 2008 after the taxpayer pumped in £45 billion so this still does not get the bank out of the water.  For example, the bank said in January it expected to report a core Tier I ratio - a gauge of a bank’s financial strength - of between 8.1 and 8.5 percent at the end of 2013 under full Basel III capital rules, below most rivals.

Luckily, it does still have a few core assets to sell.  For example, RBS has announced plans to sell its remaining stake in Direct Line, which could net the bank more than £1 billion.  The bank said it would offer 423.2 million shares, which is about 28% of the insurance firm.

Based on the current value of Direct Line shares, which closed at 263.34p on Wednesday, the sale of the remaining RBS stake could generate £1.1 billion. The bank sold 20% of its holding in the insurer in September, generating £630m.  Under European Union competition rules, imposed after the £45 billion taxpayer bailout of RBS, it must sell its entire holding by the end of this year.

As usual, there are also some emotional hotspots with £576 million bonuses being awarded to their top people, down from £679 million last year (although only £607 million was paid out after clawbacks).

One senior official in the Treasury stressed that the bonus pool was a  “tiny fraction of what it was under Labour”, explaining that the chief executive and his executive team had waived their bonuses for this year.  It was also noted that RBS has 30 people in New York that make them £1 billion a year.  That justifies some bonus.

Meanwhile, the 120,000-strong workforce could be reduced by around a quarter over the next year or so, with much of this coming from the Global Banking and Markets investment operations.  It is expected to make heavy cuts to the 11,000 jobs in its investment bank, including a retreat from its US and Asian markets businesses.  The planned sale of its US retail bank Citizens will remove 18,500 jobs, while further reductions will come from its float of Williams & Glyn’s, which employs about 4500 staff

The question that remains is: what’s the plan?

UK Chancellor George Osborne has said he wants RBS to be more like state-backed rival Lloyds Banking Group, which has minimal investment banking operations and concentrates on domestic lending. Lloyds is expected to return fully to private ownership in the next 12 months while RBS is three to five years away.

Former CEO Stephen Hester, now running troubled insurer RSA, clashed with George Osbourne over his desire to see RBS’s investment bank scaled back and for the bank to sell off its U.S. retail business Citizens.  It was this clash that led to his departure and Ross McEwan’s elevation to CEO.  Notably, Stephen Hester warned that pursuing a strategy of focusing on the UK could result in the bank becoming a  “second-best Lloyds”.

Analysts are saying that it could take more than five years to restore RBS to health and that Ross McEwan had yet to provide a credible business plan on the future direction and strategy of the remaining  “good bank”.

This remains to be seen.

Some things that Ross McEwan has made clear already is that branches need to be renovated (£700 million investment), as does its IT operations.

After the last glitch in December (RBS had a massive outage on CyberMonday) Ross McEwan admitted that  “for decades, RBS failed to invest properly in its systems. We need to put our customers’ needs at the centre of all we do. It will take time, but we are investing heavily in building IT systems our customers can rely on.”

Susan Allen, Director of Customer Relations for the Group, told the BBC that the glitch was  “unacceptable”, promising that all customers will be reimbursed for any losses.

She said that the cause of the meltdown is not yet known but a  “detailed analytics” is underway, adding that the bank is  “investing heavily in our systems “ spending  “about £2 billion per annum in making sure our systems are improved”.

This figure is apparently to increase to £2.5 billion a year.

Meanwhile, Sky News reports that Ross McEwan will outline a blueprint today that will involve removing roughly 20% of its operating costs, which hit £13.8 billion in 2012.

That target would mean slashing more than £2.75 billion of the bank’s costs, which over time will entail substantial job losses although, as mentioned, these will occur naturally as the bank spins off assets such as Citizens in the USA.

One big axe dropping however is the likely departure of Suneel Kamlani, the co-chief executive of RBS’s Global Banking and Markets business, as another clear move to close their investment banking operations. Mr. Kamlani, who joined RBS in 2010 from UBS, is likely to leave in the coming months according to internal sources.

There will also be a stronger focus on lending to small and medium-sized business customers (SMEs), which will reflect the political pressure on Mr. McEwan to ensure a greater flow of credit into the UK economy. Alison Rose, a senior investment banker at RBS, is expected to be appointed to oversee these efforts.

All in all, it is still a pretty bleak picture for RBS in the near-term but maybe a better one long-term.

As the bank recapitalises, takes gains from the sale of Citizens and William & Glyn’s, gets rid of its toxic debt, and revamps to be a credible UK retail and commercial bank, the ghost of banking past will be wiped out.

The question is what the ghost of banking future presents?

This write-up is an amalgam of lots of different news, too many to link to.  So here are a few samples if anyone wants to read more:

And finally, a profile of the new Ross McEwan, who was headlined as the ‘nearly man’ taking over helm of RBS by the Herald Scotland newspaper.


Ross McEwan was the nearly man of Australian banking before his ascent to one of the most sensitive jobs in the UK financial world.

His appointment as chief executive of Royal Bank of Scotland comes two years after a surprise decision saw him passed over in the race to become head of Commonwealth Bank of Australia (CBA).

Mr McEwan, who was head of CBA’s retail business, was widely seen as having been groomed for the role.

The New Zealander, a married father-of-two, then accepted an offer to become head of RBS’s retail arm, joining the state-backed lender just 12 months ago.

The resignation in June of his boss Stephen Hester, amid claims of political interference, paved the way for Mr McEwan to take charge - especially after a leading external candidate, BlackRock’s Mark McCombe, withdrew from the field.

His appointment is being seen as a politically-acceptable move to indicate a shift in emphasis towards the bank’s more traditional high street branches as opposed to its investment side - associated by many with high-rolling City risk-takers.

Mr McEwan is also reportedly seen as a  “carbon-copy of Antony Jenkins”, the Barclays boss hired last year to clean up the group’s image.

He has already launched a £700 million plan to improve RBS’s branches and services, and has been scathing about the state of UK high street banking.

Mr McEwan reportedly told analysts earlier this year:  “Having come into this market six months ago I’ve been quite surprised at how bad this industry is from a retail banking perspective. I’d even go as far as to say that there’s not a good retail bank, and our job is to create that.”

His spell at RBS so far has not been without its challenges - notably a series of IT glitches that hit customers trying to log in to their accounts, as well as the announcement of 1,400 job cuts earlier this year as Mr McEwan said resources were being re-focused on  “things that matter most” to customers.

However the turbulent period will have been eased by the £3.2 million share award he was reportedly given as a  “golden hello” when he joined last August.

Eyebrows may be raised in the City about the background of a chief executive who reportedly spent his early career working in human resources, and once told an interviewer that he was  “more comfortable with people than with figures”.

In the article for an alumni magazine at New Zealand’s Massey University, where he gained a business degree in the 1970s, Mr McEwan also admitted that he had twice failed accounting exams.

His background is likely to come under further scrutiny after being named as head of a bank that is 80% owned by the taxpayer.

Mr McEwan has worked in the insurance and investment industries for more than 25 years, including as managing director of stockbroking business First NZ Capital Securities and chief executive of AXA New Zealand.

In Australia, he was executive general manager in charge of CBA’s branch network before becoming head of retail banking services in 2007.

He is said to be a keen water skier and cyclist.

On the announcement that he was joining RBS last year, he told an Australian newspaper:  “It’s certainly going to be a challenge to turn the retail business around. It’s a tough economic environment and there are political aspects too.”

Mr McEwan now faces an even greater challenge as he seeks to take RBS on to a successful future just a few years after it so nearly collapsed - and having to do so under the watchful eye of the ministers who can ultimately pull the plug.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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