RBS May Be Smaller Than Barclays Today, But Its Business Model Is Much More Profitable

RBS (NYSE:RBS) and Barclays (NYSE:BCS) are two of the largest British banks. The business models of both banks have changed significantly since the economic downturn, with their paths diverging considerably. RBS in particular has shrunk considerably in size – moving away from a business model that was operationally as well as geographically much more diversified and relied considerably on investment bank operations to one that depends almost completely on traditional loans-and-deposits banking. Although Barclays has also cut down on its trading operations, its business model remains much more diversified than RBS. Trefis compares key operating metrics for RBS vs BCS in an interactive dashboard, and concludes that RBS’s business model is more profitable. The dashboard captures historical performance trends for Barclays and RBS over recent years along with our forecast for 2019. Additionally, you can find more Trefis Financial Services company data here

Barclays Has A Much More Diversified Business Model Compared To RBS

• RBS’s revenues for full-year 2018 were £13.4, with its UK Retail Banking segment contributing roughly 47% of this figure.
• In comparison, Barclays’ revenues in 2018 stood at £21.4 billion with Corporate & Investment Bank (CIB) contributing approximately 46% to total revenues
• Barclays has a more diversified model as compared to RBS. However, RBS’s focus on retail banking has helped the bank’s revenues trend higher over recent years, while Barclays’ revenues appear to have stagnated
• That said, Barclays’s revenues in 2018 were roughly 60% more than that for RBS.

RBS’s Operating Margin Has Improved Rapidly Over Recent Years, And Is Now Higher Than Barclays’

• RBS and Barclays have been quite successful in reducing costs over the years. Stringent cost-cutting measures have helped these banks significantly improve their pre-tax margins.
• However, RBS’s operating margin has seen a much larger improvement from -32% in 2016 to more than 25% as of 2018. Over 2015-16, the bank’s margins had been adversely impacted by one-time restructuring and litigation charges.
• On the other hand, cost-cutting measures have also helped Barclays’ operating margin steadily increase from 5.2% in 2015 to 16.5% in 2018 despite stagnating revenues
• But Barclays’ margin figure remains well below RBS’s

UK Retail Banking Operations For RBS and Barclays Are Comparable In Size, But RBS Has Notably Better Margins

• Given RBS’s focus on its UK operations, its UK retail banking segment was responsible for 47% of total revenues in 2018
• Moreover, absence of litigation charges and stringent cost-cutting measures have helped RBS’s UK Retail Banking pre-tax margin increase steadily from 24% in 2015 to around 39% in 2018.
• On the other hand, the contribution of Barclays’ UK retail banking segment to total revenues has remained around 35% over the last few years. As of 2018, Barclays’ UK pre-tax margin was around 26%; roughly two-third that of RBS’s.

However, Barclays’ Investment Bank Is Considerably Larger, And More Profitable Than RBS’s

• As of 2018, Barclays’ IB revenues stood at £9.8 billion with a pre-tax margin of 26.6%
• On the other hand, RBS’s IB division contributed just £1.5 billion to total revenues in 2018, with a pre-tax margin of (-5)%, with RBS still working its way through some of its legacy trading portfolio.

But RBS’s Lower Average Assets Implies That RBS’s Return on Assets (RoA) Figure Is Better

• As of 2018, RBS’s return on assets stood at 0.2%-double that of Barclays’ 0.1%
• Notably, RBS had a higher net income figure for 2018, even though Barclays reported ~60% more assets than RBS
• However, RBS’s asset turnover is similar to that of Barclays. As of 2018, the asset turnover ratio for both banks stood at 1.9%

Other Key Operating Metrics

• Barclays reported a headcount of 84K at the end of 2018, while RBS had 67K employees.
• RBS’s Revenue per employee has increased by more than 24% since 2016. Although Barclays’ revenue per employee stood at $253K in 2018 – roughly 25% higher than the figure for RBS – Barclays has seen revenue per employee fall steadily over the years.
• At the same time, Barclays’ average compensation per employee is much higher, and was $103K in 2018 as opposed to a figure of just $61K for RBS

Conclusion: Barclays Has A More-Diversified Business But RBS Looks More Profitable

• Barclays has a well-diversified business model but RBS has been more profitable over recent years.
• Moreover, RBS’s focus on retail banking, has helped the bank’s revenue nudge ahead over the past few years.
• Although RBS has rather weak margins for its Investment Banking business, the bank’s focus on its high-margin retail banking business should help it steadily grows profits going forward.
• It is hence no surprise that activist investor Edward Bramson has pushed for Barclays to adopt a business model similar to RBS over recent months – something we highlight in detail in our interactive dashboard about what Barclays could look like in 3 years if it adopts Bramson’s strategy.

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