Breakingviews-It's back to the future for RBS's investment bank

Tue Jan 3, 2012 2:56pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Margaret Doyle

LONDON, Jan 3 (Reuters Breakingviews) - It’s back to the future for Royal Bank of Scotland’s (RBS.L) investment bank. The UK government has said the state-backed bank should further shrink its wholesale arm and focus on serving UK companies. The outcome could be something resembling County NatWest, the UK progenitor of RBS’s current Global Banking & Markets (GBM) unit. But that could hardly be called a proper investment bank.

RBS has been hacking away at GBM, which now accounts for just a third of core profit, and it hasn’t finished chopping. Still, the government clearly wants a more radical retreat. RBS’s current approach is to eliminate businesses that face funding challenges or can’t earn their cost of capital. It now looks like RBS must apply a “Union Jack” test: does this business support domestic economic activity?

The equities business, which is loss-making according to someone familiar with the division’s numbers, looks likely to be the next casualty of the shake-up. It may not be hugely capital consumptive, but RBS has never been a strong player -- it generated a sixth of the revenue that industry-leader Goldman (GS.N) did in 2010, according to JPMorgan (JPM.N) analysts. Equity capital markets and advisory, including its Hoare Govett UK corporate broking arm, would follow. That’s ironic, since Hoare’s retains a strong following in UK Plc, despite its owner’s travails.

RBS’s relative strength has historically been in credit. But if the preference for UK business is to be respected, RBS might have to offload the former Greenwich Capital Markets business in the United States. That could dent returns: FICC is a scale business.

These disposals would leave RBS’s investment bank a London-centred debt house offering some limited corporate finance advice, foreign exchange, hedging, debt capital markets, and trade finance in addition to loans to a domestic client base.

Backtrack 25 years and County NatWest looked not much different -- only it had a small UK-focused stockbroking arm. But County NatWest wasn’t a great success, hence its forced expansion into the global -- although not much more successful

-- business that was NatWest Markets. The notion of a pure UK -- business that was NatWest Markets. The notion of a pure UK investment bank looks even less viable now than in 1987. But the government is paying this particular piper and it will call the tune, however off-key.

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CONTEXT NEWS

-- UK finance minister George Osborne said on Dec. 20 that he wanted to see state-owned Royal Bank of Scotland further shrink its investment banking arm.

-- “RBS has already announced that it will further shift its business strategy towards its personal and SME customers and its corporate banking business which serves UK and international companies. We believe RBS’ future is as a major UK bank, with the majority of its business in the UK and in personal, SME and corporate banking,” he told parliament.

-- “Investment banking will continue to support RBS’s corporate lending business but RBS will make further significant reductions in the investment bank, scaling back riskier activities that are heavy users of capital or funding. RBS should emerge a stronger, safer bank, able to maintain lending to businesses and consumers, and which in time can be returned to full private sector ownership.”

-- RBS already generates the majority of its revenue from the UK and from retail, SME and corporate banking. In 2010, 54 percent of revenue in those businesses not earmarked for disposal or run-off came from the UK. Only 32 percent of core revenue came from the investment bank. RBS has said it wants to obtain two-thirds of earnings coming from its retail and commercial bank.

-- RBS is conducting a review of its investment banking arm, which could result in the sale of its UK corporate broking arm, Hoare Govett, according to a person familiar with the bank’s plans.

-- Reuters story: RBS told to slash remains of investment bank [ID:nL6E7NJ2HQ]

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(Editing by Chris Hughes and Sarah Bailey)

((margaret.doyle@thomsonreuters.com)) Keywords: BREAKINGVIEWS RBS/

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