As many as 10,000 bankers at Royal Bank of Scotland face the prospect of losing their jobs, as the state-owned UK bank draws up detailed plans to retreat from investment banking.
The job cuts – combined with an expected £1 billion-£2 billion ($1.5 billion-$3.1 billion) of restructuring costs – are the worst-case scenario in plans being considered by Stephen Hester, RBS’s chief executive, who finally accepted in November that the investment bank that has propped up the group’s profits since he arrived in the job three years ago, has outlived its usefulness.
RBS’s investment bank has failed to become a credible force in several areas of investment banking, particularly equities, and the combination of the European downturn and more costly regulatory capital requirements will make life tougher still.
“Investment banking was never really understood by management,” said one person familiar with the business.
“Stephen has grown very cynical about it over the years.”
Pressure mounted just before Christmas, when George Osborne, the chancellor, said the bank, which is 83 percent-owned by the government, should “scale back [its] risky activities”.
The cuts are expected to focus on RBS’s equities business, which has failed to compete in the upper rankings of the industry. This division generated just £623 million ($971.4 million) of the £5 billion ($7.7 billion) of revenue produced by the investment bank in the first nine months of last year.
One person familiar with the bank’s plan said it was preparing to exit the cash equities business entirely and may also withdraw from equity derivatives, mergers and acquisitions advisory and shrink its structured credit and interest rates business.
That would leave RBS’s investment bank – which employs 19,000 staff – barely half its current size, with remaining strengths in debt capital markets, foreign exchange and interest rates, albeit in shrunk form.
In an attempt to avoid mass closure of the business, RBS recently appointed Lazard to hunt down buyers for its equities business, which includes Hoare Govett, one of the City’s oldest stockbrokers, as well as large operations in Australia and the US.
But analysts question the feasibility of finding a buyer for the sub-scale UK division, which they say would simply burden the new owner with lackluster earnings and inflated costs. Even if RBS did manage to sell this business, analysts say it would unlikely generate much of a profit, although it would save the bank the pain of a costly restructuring.
One London-based banker said: “This is the worst timing imaginable. Nobody has clear visibility about the future of investment banking. You will either end up with a fire sale or simply a closure of the business.”
Royal Bank of Canada has been rumored as a prospective buyer of RBS’s Hoare Govett corporate broking franchise, inherited through the acquisition of ABN Amro in 2008, though two people close to the situation said an approach from RBC was “unlikely”. A management buy-out is also seen as “not feasible”.
Optimists cited the likes of Nomura and Canaccord as alternative buyers, though most dismiss those prospects. RBS’s Asian business might attract the interest of Standard Chartered, Barclays or JPMorgan, bankers said.
RBS is also poised to withdraw from the bulk of its European investment banking business – abandoning Spain, Italy, Russia, the Nordic region and the Middle East to leave an operation focused on London, Paris and Frankfurt.
The bank could have the best chance of selling its US investment banking operations, RBS Greenwich Capital.
Based in Connecticut, this business is heavily skewed towards treasury services and US mortgage-backed securities. Analysts estimate that the US business could be worth in the low billions of pounds, although they warn that a large chunk of its revenues come from RBS clients who would not necessarily transfer their business to a buyer.
The rump of the investment bank is expected to be merged into the bank’s corporate and “global transaction services” business – the unit that comprises run-of-the-mill client services such as cash management, custody and trade finance.
RBS is preparing to lay out a strategy detailing which businesses it plans to sell or wind down ahead of its annual results presentation at the end of February, and possibly as early as this month.
It wants to make quick progress selling – or closing – the businesses that are easiest to exit, although the full restructuring could take two to three years. Bankers pointed to the risks of that long-drawn-out approach. “The operational risk of winding these things down is huge,” one banker said.
“If you’re going to lose your job at the end of it, the level of attention you pay and the quality of risk management is going to be compromised.”
Once the restructuring is complete, RBS will return to its roots as a UK retail and corporate financing bank – its home market is likely to account for about three-quarters of its balance sheet in the future, up from about two-thirds – according to people familiar with its plans.
While Mr Hester has repeatedly insisted that he was also right to hold on to the investment bank when he outlined plans to shrink the group balance sheet three years ago – he points out the business has since delivered £10 billion ($15.5 billion) of profit – critics say he should have taken a harder line following the financial crisis.