RBS’s Decision To Shutter 158 Branches Will Help Its Retail Banking Profits

Earlier this week, The Royal Bank of Scotland Group (NYSE:RBS) announced that it will close as many as 158 branches across the U.K. – making it the latest bank to pare down on redundant branches as customers switch to mobile and internet banking services for many banking needs. ^[1] The banking giant, which is owned 72% by the British government, has been struggling to return to profitability since the economic downturn of 2008, and has reported nine straight annual losses as it continues to work on streamlining its business model. The branch closures, coupled with an expected reduction in headcount by about 362 over the next six months, will materially reduce the bank’s recurring operating costs from 2018.

We are currently in the process of updating our $6 price estimate for RBS’s stock, which is around the current market price.

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At the end of 2016, RBS had a network of 1,315 retail branches in the U.K. – a figure which includes branches under the Royal Bank of Scotland brand in Scotland, the NatWest brand in England and Wales, and the Ulster Bank brand in Ireland. The announced closure targets 30 RBS branches in Scotland and 128 NatWest branches in England – reducing the total branch network to 1,157, which represents a 12% reduction in total branches. The impact on the bank’s headcount from the move will be much less drastic, as the Private and Business Banking (PBB) division employed 23,300 people at the end of 2016. Of the 770 employees working at the branches earmarked for closure, roughly 410 will be moved to other roles – reducing the overall headcount for PBB by 362, or 1.6%.

Many banks have been shuttering branches in recent years, as more and more customers use online banking services rather than branch-based services. Most major U.S. and U.K. banks have announced plans to shrink their physical presences to varying degrees, as they focus on expanding their mobile-based and online banking services. This, in turn, has helped reduce operating costs for these banks, as staff and branch-related costs form a major chunk of their operating expenses in any given period.

While the branch closures will attract one-time expenses, which will be incurred by the PBB division in 2017, there should be a sizable reduction in overall operating expenses for the division in 2018. RBS reported £690 million in staff expenses for PBB in 2016, and a reduction in headcount by the 1.6% figure detailed above should reduce these expenses by around £11 million. More importantly, the division incurred £2.3 billion in other operating costs for the year (excluding one-time litigation and restructuring costs). As the branches being closed will mostly be smaller ones, the reduction in costs will not be proportional to the reduction in the number of branches. Assuming that the 12% reduction in number of branches reduces overhead operating costs by 5%, this translates to cost savings of ~£115 million for the division. So RBS should be able to save as much as £125 million in recurring costs from its recent decision to close 158 branches.

The chart below captures the operating expenses for RBS’s retail banking operations as a proportion of revenues for the division. You can see how a reduction in expenses impacts our estimate for RBS’s share price by modifying the chart.

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1. RBS and NatWest to close 158 branches as customers go digital, The Guardian, Mar 23 2017 [↩]