RBS Sees Investment Bank Fading to Insignificance in 3 Years

Bloomberg Business Richard Partington

July 30, 2015 — 8:11 AM BST Updated on July 30, 2015 — 2:14 PM BST
Royal Bank of Scotland Group Plc said it would speed the breakup of its investment bank after the division’s losses ballooned, and predicted the division would shrink to near-insignificance as early as 2017.Investment banking “will not be a particularly significant part of our business” in two to three years, Chief Financial Officer Ewen Stevenson told reporters at a meeting in London Thursday.

Chief Executive Officer Ross McEwan is seeking to return to lender to a full-year profit as the government prepares to sell 25 billion pounds ($39 billion) of stock in the bank within five years. Britain’s biggest taxpayer-owned lender has been dismantling its investment bank since the financial crisis, when the lender received a state bailout.

Losses at the corporate and institutional bank, which houses the investment bank, widened to 1.3 billion pounds ($2 billion) in the second quarter from 25 million pounds a year ago, the bank said in a statement Thursday. Operating costs jumped 61 percent, while litigation and conduct expenses surged more than sevenfold.

RBS shares swung between gains and losses and were 0.6 percent lower at 351 pence as of 1:27 p.m. in London.

“The restructuring of CIB is planned to accelerate during the second half of 2015,” RBS said. “This is expected to result in lower revenues, partially due to higher disposal losses, and elevated restructuring costs.”

Cost of Capital

The corporate and institutional bank, excluding parts of the business RBS wants to exit, broke even in the second quarter.

That “is not a bad result if you go back far enough in that business,” Chairman Philip Hampton told reporters. “It’s accumulated losses so far this century, off and on.”

It will take three to four years to get the investment bank to perform at its cost of capital, McEwan told journalists. He said earlier that although there is “no job number” for headcount reductions, cuts at RBS would be “particularly in our corporate and institutional bank,” the unit housing the investment bank.

Although McEwan said he would be “patient” with the unit’s performance over the restructuring period, it “has to produce the returns” he demands in future.

The company said the investment bank plans to cut risk-weighted assets by 25 billion pounds by the end of this year and repeated that the corporate and institutional banking unit will simplify to focus on debt financing and risk management.

Revenue Halves

The bank may cut two-thirds of jobs in the division, a person familiar with the plans said in March. The CIB unit employed as many as 18,000 people at that time, out of RBS’s workforce of more than 100,000.

Revenue halved to 520 million pounds, while the rates, currencies, and credit businesses all posted lower income in the second quarter compared to a year ago.

The rates and credit business RBS plans to keep was hurt by uncertainty in the euro region, while the Swiss central bank’s decision to scrap the ceiling for the franc hit the currencies unit, RBS said.

Scott Eichel, the global head of asset-backed products and credit trading for the investment bank, left the shrinking investment bank in June.

“Investment banking results were soft in our view, largely driven by the exit of credit trading in North America, but other areas looked weak,” said Joseph Dickerson, an analyst at Jefferies International Ltd., who has a buy rating on the stock.

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