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Banking

RBS axes 3,500 jobs in pivotol shake-up

RBS slashes investment banking positions, although the unit's CEO John Hourican is still in line for a £4 million bonus

So, it's official. RBS has slashed another 3,500 jobs, after shedding around 30,000 employees during the past two years, with 22,000 of these in the UK.


In another big shake-up to the 83% state-controlled bank, an RBS statement reads that most of the cuts and changes "will begin immediately, but may take up to three years to implement. RBS will provide final detail with its full-year 2011 results on February 23." it continues:




The changes will see the reorganisation of RBS wholesale businesses into "markets" and "international banking", and the exit and downsizing of selected existing activities.



Only on January 5, Euromoney reported that RBS could see as many as 10,000 bankers lose their jobs as it prepared for paring back its investment-banking operations to skeletal levels.


I mean, it is almost predictable this would happen if it hit tougher times, considering the taxpayer owns more than 80% of the institution.


In a statement to the press, group chief executive Stephen Hester said: 




This strategy has succeeded in making RBS stronger and placing us on the road to long-term success.

We have reduced our balance sheet by some £600 billion and have rebuilt capital ratios that place us among our strongest international peers. Our core retail and commercial businesses outside Ireland now operate with an attractive return on equity overall.

Our investment bank has produced an average return on equity of 19% and delivered over £10 billion in profits since 2009. Our non-core assets have fallen below £100 billion, ahead of schedule. Profits from our core businesses have been essential to pay for the clean-up losses of RBS legacy.

But for our strategy to be effective, it must adjust to fresh challenges.

And it is clear that, particularly in the wholesale banking arena, significant new pressures have emerged. The changes we are announcing today seek to ensure that RBS is at the front of the pack in pursuing a strategy that reflects the environment we expect to operate in.

Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall.

The changes will include an exit from cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses.

Significant reductions in balance sheet, funding requirements and cost base in the remaining wholesale businesses will be implemented.



Also unsurprising is the UK bank's move to pare down and restructure the division, despite its success 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 five overall for euro rates and top 10 for dollar rates in Euromoney’s benchmark survey last year. 


Rightly, RBS has recognised this and Hester confirmed that:



We will continue to invest in our existing fixed income and currencies business and focus on delivering world-class customer service, risk management, IT systems and solutions.

We will, however, reduce the usage of balance sheet and of unsecured wholesale funding within these businesses and also reduce areas where capital intensity is high, evolving our business model to support these activities but in a less balance-sheet-intensive manner.



UK banks are also under pressure to restructure investment and retail banking under new regulations outlined in the Independent Commission on Banking’s report by Sir John Vickers – dubbed the Vickers report.


The ICB published a number of proposed reforms on the UK banking system on September 11 to:




“ ... create a more stable and competitive basis for UK banking in the longer term and provide more than greater resilience against future financial crises and removing risks from banks to the public finances”.



The Vickers report says banks would need to ring-fence their retail banking businesses from their investment banking operations by 2019, which it is hoped will lead to a:


 



“banking system that is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure-payments systems, efficiently channelling savings to productive investments, and managing financial risk”.



RBS's Hester reiterated that:




The revised wholesale strategy and structure is designed to help transition RBS toward ring-fencing requirements being legislated for UK banks.



Moreover, other more detailed steps include:




[restructuring] our existing GBM and GTS Divisions.

The "markets" business will maintain its focus on fixed income, with strong positions in debt capital raising, securitisation, risk management, foreign exchange and rates. It will serve the corporate and institutional clients of all group businesses.

GBM's corporate banking business will combine with the international businesses of our Global Transaction Services arm into a new "international banking" unit and provide clients with 'one-stop shop' access to our debt financing, risk management and payments services. This international corporate business will be self-funded through its stable corporate deposit base.

The domestic small- and mid-size corporates currently served within GTS will be managed within RBS's domestic corporate banking businesses in the UK, Ireland (Ulster Bank) and the US (Citizens).

We are considering sale or closure options for our cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses which had income of £220 million in the nine months to September 2011 and are currently unprofitable.

We are in discussions with a number of potential buyers though there is no assurance of a sale concluding.

We took this decision because we want to prioritise our resources on those businesses where we are best with customers and can operate most profitably for shareholders. We intend to retain our leading investor products business internationally in equity and fixed income derivatives.

This business is both profitable and provides valuable funding for RBS.



UK banks, as with European banks, are under pressure to maintain minimum capital requirements and a bufferzone, should another large incident in the markets happen – and compared to its European counterparts, the UK banks seem spectacular in comparison (as seen below, when on December 8, the European Banking Authority (EBA) announced that European banks must raise €114.7 billion of additional capital buffers by June, so 8% more than its initial estimate of €106 billion). 



 BANKS INDIVIDUAL RESULTS

Country                              Bank                                                                                     Bank Code        Shortfall
                                                                                                                                                                       millions in €
 
 Source: European Banking Authority


But there is no doubt that the 3,500 job cuts will only add more fuel to the fire on the fact that RBS's investment banking CEO John Hourican is set to receive a £4 million bonus.


While there is no official line on this yet from the bank, it will be interesting to see the statement when it comes out.


But saying that, it will be a tough time ahead for Hourican, as he now has to make sure that 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


- Euromoney Skew Blog


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