Last week, The Royal Bank of Scotland Group (NYSE:RBS) announced its decision to cut as many as 2,000 more jobs across its global investment banking operations – a piece of news that did not attract much attention given the simultaneous announcement by the U.K. banking group that CEO Stephen Hester will resign this December and that the search for his replacement is already underway.  Investors did not take the rather unexpected ouster too well, with the bank’s shares tanking nearly 5% following the news and maintaining the level since.
While we agree that Hester’s departure is yet another hurdle to RBS’s re-privatization plan, we also think that the continued shrinking of the investment banking arm will do the 81% government-owned banking group more harm than good. Already reduced to a ghost of its pre-2008 self, further downsizing in the bank’s investment banking operations will make it increasingly difficult for the business to churn out enough revenues to justify its sustainability. The resulting reduction in RBS’s geographical presence will also have a negative impact on its international banking business. Given these consequences, it would appear that RBS has caved in completely under pressure from the U.K. government to focus on its U.K. retail banking business (see ICB Directives to Stunt RBS’ Growth, Could Lead to Citizens Sale).
We are currently in the process of reviewing our $11 price estimate for RBS’s stock, given Hester’s exit from the bank and the latest round of investment bank job cuts.
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The Investment Bank Division Has Seen Bigger Job Cuts In The Past
RBS arguably underwent the most extensive reorganization among all the global banking giants in the wake of the 2008 economic recession with the bank reducing total jobs across its operations by 78,000 in the last five years (see The Big Four U.K. Banks Have Cut Jobs Dramatically And There Is More To Come). While a large part of this downsizing was mandated by the European Commission (EC) as a condition for RBS’s bailout, the continuing slowdown in Europe has had a hand in the more recent job cuts.
The bank’s investment banking business (reported by RBS as ‘Markets’ in its financial reports) saw a sizable chunk of job reductions with the bank deciding to do away with its equities business almost entirely – including its cash equities, corporate broking and equity capital markets operations (see RBS Shrinks by a Third, Fixed Income Focus From Here). RBS also shuttered its M&A advisory arm choosing to focus entirely on the fixed income trading and debt capital markets businesses. To put things in perspective, RBS employs less than 9,500 people in its Markets segment today – about two-thirds the nearly 15,000-strong workforce the segment boasted of in early 2008. In the process, it halved the segment’s expenses from £5.8 billion to £2.9 billion ($9 billion to $4.5 billion). ((RBS to cut 2,000 more jobs as shares tumble, The Independent, Jun 13 2013))
But Is The New Set Of Layoffs Really Worth It?
With the proposed reduction of 2,000 jobs over the next two years, the employee strength will fall close to 7,500 by the end of 2015 – helping RBS achieve its target of cutting investment banking expenses to the £2-2.25 billion ($3-3.5 billion). But at what cost?
As we mentioned above, RBS’s investment banking operations are almost completely focused on the bond industry. And as we pointed out in the article Deutsche Bank: The Bond Industry’s Reform Will Lead To Further Consolidation given the impending regulations and competitive pressure in the industry, incumbents will have to bulk up to derive real value from bond trading. Trimming the operations in the way RBS proposes will only allow it to break-even at best.
To make things worse, this move will also adversely affect RBS’s ability to attract corporate clients towards its international banking services, as the bank will no longer be able to provide the full spectrum of services across the globe as effectively as it used to earlier. This will only lead to a faster decline in assets for this business than what we forecast (shown in the chart below).Notes: