RBS Earnings: More Investment Banking Cuts And Citizens Spin-Off

by Trefis Team
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Royal Bank of Scotland
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It looks like there will be a lot to look forward to from The Royal Bank of Scotland Group (NYSE:RBS) this Thursday, as the Britain-based banking group is reportedly going to follow-up its performance release for the last quarter and full year 2012, with the announcement of another round of drastic cuts to its investment banking division along with a plan to float its U.S. retail banking arm Citizens. [1] [2] RBS has been under immense pressure from the U.K. government over the past year to focus on its retail operations in the U.K., and it was only a matter of time before it gave in, considering the government’s 81% stake in the group.

There is another thing that can be deduced from the timing of RBS’s decision to announce these changes – the earnings figures are expected to be poor. The result won’t really be a surprise, given the bank’s $612 million fine for LIBOR manipulation (see RBS Foots $612 Million Bill To Settle LIBOR Manipulation Charges) and other potential multi-million dollar charges related to PPI and interest-rate securities sales. The bank has reported a net loss for each of the first three quarters in 2012.

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.

See our full analysis for RBS’s stock

More Job Cuts, Asset Sale On The Horizon For Investment Banking Division

Last January, RBS took its first major step towards revamping its loss-making and capital-intensive investment banking division by announcing its decision to exit the equities business almost completely (see RBS Shrinks by a Third, Fixed Income Focus From Here). Since then, its M&A, cash equities, corporate broking and equity capital markets operations have been sold or shuttered, leaving the bank to focus only on its fixed-income business.

But apparently there is still some flab which the bank is being forced to lose, and fast. Another round of cuts is expected to shrink investment banking assets by an additional 10%, and also cut jobs in middle and back office functions like admin and IT support. [1] The result – a slight reduction in investment banking revenues more than made up for by a reduction in expenses for the business along with a marked improvement in RBS’s capital structure at the group level.

Floating Citizens Bank Could Bring In Between $10-$12 Billion Over Coming Years

In December 2011, we had detailed the possibility of RBS exiting its Citizens & Charter One businesses in the U.S. as a part of our article ICB Directives to Stunt RBS’s Growth, Could Lead to Citizens Sale. Although, the group’s management has been quite clear about its plans to retain the U.S. retail banking business, it looks like an exit is on the cards. Facing pressure to clean up its balance sheet and concentrate on operations in the U.K., this was always a logical next step for RBS with the only deterrent being the need to find someone willing to pay something around the estimated $10 billion fair price of the business.

RBS is expected to test the waters by first selling off 20-25% stake in Citizens to the public through an IPO – largely on the lines of what it did with its insurance business, which was spun-off partially as the Direct Line group. However, this stake sale could take about two years to materialize with a complete exit years away.

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Notes:
  1. RBS plans cuts to investment bank in push to stem losses, The Telegraph, Feb 24 2013 [] []
  2. RBS to unveil £8bn US bank float, The Telegraph, Feb 24 2013 []
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