The Royal Bank of Scotland (NYSE:RBS) has decided to wind down its mergers & acquisition (M&A) unit after a year-long attempt to find a buyer for the business proved futile.  The M&A unit, which has around 40 employees, was the last to be sold or discontinued from the list of investment banking business units that RBS had earmarked early last year due to poor performance since the economic downturn of 2008. No doubt the increased pressure to focus on traditional banking services from the British government, which owns an 82% stake in the global banking group, was a significant factor behind the bank shifting its focus away from investment banking operations. Besides, difficult economic conditions only hastened the process given that other major European investment banks like Barclays (NYSE:BCS) and UBS (NYSE:UBS) are also making drastic cuts in their investment banking businesses.
We are in the process of updating our $9.50 price estimate for RBS’s stock to factor in the impact of its proposed privatization plan over the coming years as well as from the recently announced relaxation to Basel III capital requirement norms.
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RBS’s M&A unit was an important source of revenue for the bank prior to 2008 – a period over which the banking group had diversified significantly across all banking services (investment banking services in particular). But the quick decline in the division’s performance is evident from the fact that its total revenues from 2008 to 2012 were about $790 million compared to $436 million in 2007 alone.  The division roped in under $75 million in fees last year, although the management’s directive to the M&A team of not taking up any new business unless it could be completed by the end of the year negatively impacted the results.
Over the last year, RBS worked its way through its cash equities, equity research, brokerage and equity capital markets units – all of which had a poor performance record in recent years.  The M&A business completes this list. The series of exits help the bank on multiple fronts: cutting costs, fulfilling demands laid out by the British government as well as freeing up considerable capital. The efforts should pay off for the bank in the long run as the improved focus on businesses it has a notable expertise in should help improve margins for its investment banking operations, as represented in the chart below.Notes: