RBS and investment banking: giving up the golden egg?
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RBS and investment banking: giving up the golden egg?

Do these reports mean that RBS’s global head of banking and markets, John Hourican has failed? Not necessarily

Reports today put more meat on the bones of the long-running rumours that RBS will soon strip its investment banking operations to skeletal levels.

According to the FT:

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 £1bn-2bn of restructuring costs

The cuts are expected to focus on RBS’s equities business, which has failed to compete in the upper rankings of the industry.

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.

Most of this should come as no surprise.

The UK government’s 80+% stake makes it impossible for RBS to have any ambition to be a global, full-service investment bank.

Truth is, it never really was. It’s always been a bit player at best in equities. It’s an afterthought in the world of M&A. It was good at structured credit, but that’s a capital intensive, low-volume game these days.

But the good bits of RBS’s markets operations have always been the key to getting money back for the UK taxpayer.

That has not changed since Euromoney was the first magazine to get an interview with RBS’s global head of banking and markets, John Hourican, back in May 2009, which remains the most comprehensive interview he has given and below is an exerpt of some of the interview:

A rabid UK mass media, looking at the losses incurred and the earnings of senior RBS staff in recent years, called for the division to be consigned to the dustbin of history. And yet Hourican decided to take on the responsibility of running what is in effect RBS’s investment bank – the most pilloried type of job in banking, at one of its most pilloried institutions.

Of course Hourican, a charming yet razor-sharp 38-year-old Irishman, does not see it that way. "Let’s get over the misunderstanding that having a wholesale business is a bad thing," he says. "Yes, we had a very large balance sheet at a terrible time. But a small percentage of our business created the losses. Most of our businesses are fundamentally good. They have not just survived the past difficult couple of years in the market, they have flourished."

But RBS’s wholesale banking operation is already a very different animal to what it was six months ago. Entire business lines have been shut down. They include product areas in which RBS was previously a clear market leader, such as project finance and leveraged finance – the latter a painful decision for Hourican as it was a division for which he had previously been directly responsible.

Tougher still, perhaps, has been to motivate remaining staff who have suffered both personally and professionally at RBS. Speculation about job losses and compensation at RBS had become the subject matter for the front pages rather than the business pages.

Hourican had to get his key staff on side. He articulated a clear strategy to them in order that they could, as he puts it, "regain their pride and their composure", and made them a firm commitment. "Our job is to recover value for our shareholders," he says. "And we will do that with people who want to be here and have the skills and drive to fulfil the potential within our business. That means we have to pay competitively to keep or get the right people. My bond with my staff is that they will not be disadvantaged for working at RBS rather than our competitors."

So do these reports mean that Hourican has failed? Not necessarily.

The key for Hourican now is to make sure RBS keeps those businesses that continue to work for RBS operating at a high level. In the post-crash age, there is no reason why a firm that concentrates on closely-related markets such as DCM, FX and rates should not prosper.

RBS continues to do well in foreign exchange, as our colleagues at EuromoneyFXNews recently reported:

Foreign exchange provides the best return on equity of any capital markets business. To drive more volume through their franchises, banks need a successful prime brokerage business. For RBS, it holds the key to making up lost ground in foreign exchange.

The bellwether on this will be what happens to the rates business. RBS was a top rates house before the crisis and has largely remained so, ranking in the top 5 overall for euro rates and top 10 for dollar rates in Euromoney’s benchmark survey last year.

It will be interesting to see if RBS has managed to maintain that position when the next set of results is published in March this year. If RBS is forced to give up the ghost in rates, then it becomes a niche player at best in global markets.

That may suit the UK’s politicians. But it won’t be the best of news for its taxpayers. 

- Euromoney Skew Blog

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