Royal Bank of Scotland, the world’s largest bank by
assets before its near collapse and rescue by the UK government a
year ago, remains on taxpayer-funded life support. But according to
a recently released five-year turnaround plan, the bank’s core
businesses offer strong prospects for growth. Douglas Blakey
reports
Go deeper with GlobalData
One year after the UK government stepped in to rescue Royal Bank
of Scotland (RBS), at the time the world’s largest bank by assets
with £2.2 trillion ($3.5 trillion) on the balance sheet, the group
has detailed plans to shrink its balance sheet and focus on its
core businesses with the aim of posting a “sustainable return on
equity of over 15 percent”.
As with transatlantic contemporary Citigroup –
and a host of other major banks crippled by the global turmoil –
RBS has spent the last 12 months selling or trying to sell numerous
arms of its business in an effort to repay government support and
return to profitability.
In contrast to Citigroup, however, which has
allocated large sections of its retail banking operations to its
non-core Citi Holdings unit, including consumer finance businesses
in Europe, South Korea and India (see RBI
619), RBS intends to focus on its core strengths in retail and
commercial banking.
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By GlobalDataRBS’ ambitions were outlined in a five-year
turnaround plan called Re-tooling RBS, released by new CEO Stephen
Hester on 29 September. He said that around two-thirds of the
bank’s future profits will be derived from its retail, commercial
and insurance divisions with the remaining one-third accrued from a
slimmed-down wholesale and investment banking unit.
Such a comprehensive shift in strategy, if RBS
pulls it off, is evident from its 2007 results, the last fiscal
year before the banking crisis took hold.
RBS’ retail unit posted profits before tax of
£2.9 billion, less than 30 percent of group profits of £10.3
billion while the bank’s corporate markets unit reported profits
before tax of £5.6 billion.
Road to recovery?
Having reported a UK corporate loss
of £24 billion in 2008 and with more than £300 billion of assets
insured by the taxpayer, Hester claimed RBS was now on the road to
recovery.
But in an apparent dig at the bank’s past
management, Hester added RBS would need to spend around £6 billion
on IT and marketing in the next five years if it was to meet its
targets.
“Both in absolute [and] in ratio terms
relative to our competitors, we have under spent on technology and
we have also spent more of it on running the bank, in other words,
dealing with lots of different systems inherited from past
acquisitions, than changing the bank,” said Hester, whose
predecessor Fred Goodwin spent around $140 billion on acquisitions
as CEO.
In particular, IT spend at RBS accounted for
7.2 percent of the bank’s revenues between 2005 and 2007, compared
with 8.7 percent IT spend by its regional peers. Hester said: “RBS
was built as an acquisition machine. Some of the quality that
allows business to grow organically was neglected through a series
of distracting business integrations.”
In particular, Hester was scathing about RBS’
lack of a unified IT platform – in sharp contrast to Santander’s
much-lauded Partenon system, for instance.
The bulk of the technology investment (55
percent) will be directed to cost reduction programmes in
manufacturing and improving customer service, with 12 percent
allocated to multi-channel development and 10 percent to data
centre consolidation and insurance claims handling
optimisation.
|
Performance |
||
|
Royal Bank of Scotland – |
||
|
2008 |
2013 target |
|
|
UK retail (%) |
62 |
50 |
|
US – Citizens (%) |
63 |
55 |
|
Ulster Bank (%) |
69 |
50 |
|
Wealth division (%) |
65 |
50 |
|
Source: Royal Bank of Scotland |
||
Transformation investment
Technology investment aimed at the
bank’s UK retail arm includes £800 million of what it termed
“transformation investment”, including product enhancement, new
internet and telephony platforms, designed to produce annual
customer service savings of around £350 million.
The bank’s need to invest in channel
optimisation, with only around 26 percent of its retail customers
using the bank’s online service, was highlighted by Hester, who
observed: “We are behind in the UK in online service to our
customers, particularly on the retail side. We are middle of the
pack. Our ambition is to be better than middle of the pack.”
As for the bank’s UK branch network, RBS plans
to “reconfigure its branch footprint” but in the absence of an
overly impressive online channel or indeed a nascent mobile banking
channel, a sharp reduction in the branch network is not being
envisaged – though the bank has said it may sell 300 branches to
appease European Commission concerns over UK state aid.
In the US, a market in which RBS’ Citizens
unit is the 10th largest by branches (1,480), Hester said the RBS
Group had become too distracted by moving away from its regional
footprint. It was now focused on its core markets in 12 states
which offered “massive opportunities to improve cross-sell and
deepen relationships which will be much more profitable than
spreading ourselves very thinly across the US, which was our prior
strategy”.
Exploiting joint activity to cross
sell
Indeed, key to the bank’s retail
ambitions is improving its cross-selling statistics, with each of
the bank’s business units, banking and insurance, “signed to
measurable targets across a range of exploitation of joint activity
[in] cross-selling”.
With retail deposits of £84.3 billion,
equating to a market share ranking of sixth in UK retail savings,
there is scope for RBS to improve its retail deposits
competitiveness, stressed Hester. In fact, the need for RBS to grow
its deposit base and move towards stable funding resulted in
further criticism by Hester of the previous RBS hierarchy.
“Not a single one of [RBS’ deposit franchises]
has historically been run other than purely for profit. We are now
going to run them for both profit and funding ability. We can get 4
percent to 5 percent per annum growth in deposits over the next
four or five years, a touch ahead of expected nominal GDP growth
over that period, therefore requiring a bit of market share
gain.”
A U-turn on credit cards
Future market share growth in the
credit cards sector is, however, off the agenda for RBS.
Within days of Hester’s presentation, the UK’s
fourth-largest credit card issuer announced it would limit its
credit cards to existing current account customers, in a major
U-turn following RBS’s promotion in the past year of its Platinum
card, which offered 0 percent interest for 15 months on card
balances transferred from rival card issuers.
“We are focusing where we can on helping our
current account customers, savers and mortgage borrowers and this
move helps us improve the service we can provide to them. We are
very much open for business and welcome new customers who want a
current account and a credit card from us,” an RBS spokesperson
told RBI.
RBS’ credit card initiative mirrors a similar
but less publicised move around 12 months ago by rival HSBC.
While Hester said the bank was ahead of its
previously announced target of reducing costs by £2.5 billion by
2011, he stressed the need to slash the bank’s cost-income ratios:
in UK retail a target of 50 percent by 2013 compared with 62
percent in 2008 was disclosed, while its US Citizens division was
tasked with cutting its cost-income ratio to 55 percent from 63
percent over the same period.
And though the Citizens franchise is currently
regarded as a core asset, Hester did not rule out a possible
disposal.
“Our ownership of Citizens does give us
strategic options in both directions, because Citizens will enjoy
synergies with other banks in the US, which could either allow us
to make acquisitions on an advantaged basis or to be acquired,” he
said.
RBS’ retail ambitions will receive a further
boost from increased marketing spend, another area Hester believes
it has underspent its peers, with marketing spend in the UK in the
period 2005 to 2007 of £2.50 per £1,000 of revenue compared to an
estimated £4.50 per £1,000 of revenue at its major rivals.
In the US, the corresponding figures for
Citizens compared to its peer group were $2.40 per $1,000 of
revenue compared to $4 per $1,000 at its rivals, resulting in
further marketing spend earmarked for the US.
Though the bank now believes its needs to
brush up its marketing strategy, Hester presented internal RBS
statistics to back up his claim that all of the bank’s various
brands had managed to report net increases in customer numbers in a
year in which press coverage of the bank was almost universally
negative.
He said that all of the bank’s core units,
retail and wholesale, had grown customer numbers during the past
year. At 12.6 million and 9.7 million, current account and savings
account customer numbers in the UK had grown by 3 percent and 18
percent respectively in the past year while its wealth unit grew
customer numbers by 1 percent to 29,000.
|
PERFORMANCE |
||
|
Royal Bank of Scotland – funding |
||
|
H109 |
2013 target |
|
|
UK – retail loan to deposit ratio (%) |
116 |
105 |
|
Ulster – loan to deposit ratio (%) |
206 |
150 |
|
US – retail and commercial loan to deposit |
87 |
90 |
|
Group – loan to deposit ratio (%) |
145 |
100 |
|
Source: Royal Bank of Scotland |
||
