RBS Puts Coutts International Up For Sale, Exits Japan Bond Trading Business

RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

The Royal Bank of Scotland (RBS) Group (NYSE:RBS) has initiated the sale of its private banking and wealth management business, Coutts International. [1] The global banking giant announced plans to sell the Switzerland-based international arm of the Coutts business in August as it remains under pressure from the British government to focus on its efforts on operations in the U.K. The British government is also a majority stakeholder in RBS since its bailout in the wake of the economic downturn of 2008. Coutts International has around $36 billion in assets under management, and a sale could fetch as much as $1 billion for RBS once a deal is finalized early next year.

RBS has also announced plans to discontinue its bond trading operations in Japan. [2] The unit will see a reduction of more than 200 jobs by next February, with RBS retaining just 30 employees to continue serving existing clients. The move is not entirely unexpected, given the profitability concerns faced by several global banking giants including Citigroup (NYSE:C) and UBS (NYSE:UBS) in the country over recent years. With RBS looking for ways to boost its bottom line while also complying with directives to shrink its investment banking business, shuttering its Japanese bond trading unit looks like an obvious choice. RBS had detailed plans to exit the U.S. mortgage trading business less than a month ago (see RBS Eyes Complete Exit From U.S. Mortgage Trading Business).

We are in the process of updating our $13 price estimate for RBS’s stock, as the sale of Coutts International will have a material impact on our analysis of the bank.

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See our full analysis for RBS’s stock

RBS arguably underwent the most extensive reorganization among all the global banking giants in the wake of the economic downturn, with the bank reducing total jobs across its operations from 226,400 at the end of 2007 to less than 113,000 at the end of Q3 2014 – a reduction of more than 50% over this period. A large part of this downsizing was mandated by the European Commission (EC) as a condition for RBS’s bailout. However, in recent years it was also driven by a strategic shift from a highly diversified business model to one focused on retail and commercial banking operations in the U.K. This was largely due to sustained pressure from the British government – something that is responsible for bank’s decision to sell Coutts International and to exit the bond trading business in Japan.

This is particularly true for Coutts International, as RBS was working hard to grow its Coutts business in late 2011 with global rebranding efforts being the first step of a plan to double the size of the business within several years. ((Coutts to drop RBS Brand, Financial Times, Oct 30 2011)) But the British government’s directive forced the bank to instead split the operations into two – domestic and international – and to get rid of the international business. [3] RBS brought in Goldman Sachs to oversee the sale process for Coutts International in October, and began testing the waters for potential buyers with a condition that the “Coutts” brand name will remain with RBS. [4] Since then, the unit has generated interest from several global private banking players including Credit Suisse, Julius Baer and Malayan Banking. [1]

Coutts International forms a majority of RBS’s private banking operations, with the unit housing $36 billion of the roughly $50 billion in assets the entire business manages. Our analysis of the bank shows that the sale of Coutts International will reduce the bank’s total value by around $800 million – which makes the $1 billion asking rate for the unit plausible if one factors in cost synergies for a buyer established in the industry. As you can see by making changes to the chart above, a reduction in private banking assets by $36 billion reduces our price estimate for RBS by roughly 2%.

In comparison, the bond trading unit in Japan is primarily facing the ax because of its low profitability. As a pre-requisite for its bailout in 2008, RBS was forced to shrink or sell several of its operating units, and one of the side effects of the ensuing divestments was that the bank had very little cross-selling opportunities left in countries outside the U.K. The increasing pressure to cut investment banking operations by the British government further strangled international growth, making it difficult for the bank to report profits for several trading desks around the globe. With weak economic conditions in Japan only exacerbating the problem, the bank’s decision to discontinue bond trading services in the country looks like a good call under the circumstances.

The move is expected to have a minimal effect on RBS’s fixed-income, currencies and commodities (FICC) trading revenues in the long run. You can understand how this influences RBS’s total share value by making changes to the chart below, which captures this revenue source.

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Notes:
  1. RBS launches sale of Coutts, invites bids before Christmas, Reuters, Dec 8 2014 [] []
  2. RBS Said to Exit Bond Trading in Japan as Firm Cuts 200 Jobs, Bloomberg, Dec 10 2014 []
  3. RBS confirms it’s considering sale of Coutts’ international arm, Reuters, Aug 11 2014 []
  4. RBS ‘will stop Coutts International buyer using brand’, The Telegraph, Oct 3 2014 []