Coverage Launch: $12.41 Trefis Price Estimate for RBS

February 3rd, 2011 by Trefis Team
RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

The Royal Bank of Scotland (RBS) Group (NYSE:RBS) is the holding company of a global banking and financial services group. The company operates in the United Kingdom, the United States, and internationally through its two principal subsidiaries, The Royal Bank of Scotland plc (the Royal Bank) and National Westminster Bank plc (NatWest). It competes with other worldwide banking institutions and financial services group like Citigroup (NYSE:C), Barclays (NYSE:BCS), Bank of America (NYSE:BAC), UBS (NYSE:UBS) and JPMorgan Chase (NYSE:JPM).

Understanding Sources of Value for RBS: $12.41 Trefis Price Estimate

See our full analysis and $12.41 price estimate for RBS

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We have broken down our analysis of RBS into the following business segments:

  1. Sales, Trading & Investment Banking
  2. RBS & Natwest UK Consumer Banking
  3. Citizens & Charter One US Banking
  4. UK Business Banking
  5. Insurance
  6. Wealth Management
  7. Global Transaction Services
  8. Ulster Bank in Northern Ireland

Global Investment Banking Industry

The revenue generated by investment banks consists of fees for services rendered to clients, as well as income from the sales and trade of securities. The fee component includes services like underwriting, raising funds through IPO’s, private placements or debt issuance, advising on mergers & acquisitions (M&A), and even providing credit facilities to banks.

The investment banking industry saw a significant revival in 2009 after the global economic recession in 2008. Net revenues for the investment banking industry were at an all-time high of $328 billion in 2007, before they fell to $213 billion in 2008. Global recovery and the increase in trading of fixed-income securities helped the industry revenues to reach $311 billion in 2009. [1]

Increased focus on consolidation in industries across the world though M&A is expected to drive growth in the investment banking industry in the years to come. Underwriting services are also expected to continue to be a growing source of revenue for the industry in the near future.

The Sales, Trading & Investment Banking Division at RBS

The global banking and markets (GBM) business is the investment banking arm of RBS. It provides debt and equity financing, risk management and investment services to major corporations, governments and institutional investors around the world. Organizationally, the business is broken down into revenue lines focused on money markets, rates flow trading, currencies and commodities, equities, credit markets and portfolio management & origination.

The sales, trading and investment banking division is the biggest source of value for RBS, contributing more than 30% of our estimated stock value for the company. In 2009, this division was responsible for almost a third of RBS’s total revenue and contributed more than 60% of the company’s gross profit value.

Eighty percent of the revenues of this division were in the form of commissions and fees, amounting to a value of more than $14 billion. With companies across all industries unable to raise funds to finance their expansion or growth plans in 2008-2009, there is a substantial amount of pent up demand for raising funds in the year to come. The M&A scenario is also improving worldwide, with a 9% increase in the revenue from deals in the year 2010 over 2009. [2] The growth has been led by increased M&A activity in the Americas and Asia-Pacific.

RBS has made considerable efforts to improve its focus on clients in the last few years. It implemented a global priority client initiative in 2009 which helped it build a sustained competitive advantage for its business. The strength of its customer base is what allowed RBS to participate in the five largest equity issues worldwide as well as six out of the ten biggest debt capital market (DCM) transactions globally in 2009.

Our forecast for the investment banking division’s revenues are largely dependent on the division’s commissions and fees income.

We believe that going forward the commissions and fees income generated by RBS will go back to pre-recessionary levels. This forecast reveals the effect of  the predicted reduction in debt issuance – a major source of the division’s revenue – due to growth in equity issuance in developing countries and the recovery of the equity market in developed countries.

Notes:
  1. Investment Banking and Capital Markets Report, The Boston Consulting Group, March 15 2010 [↩]
  2. Investment Banking Review, Financial Times, Dec 20 2010 [↩]