RBS Shrinks by a Third, Fixed Income Focus From Here

by Trefis Team
Royal Bank of Scotland
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The RBS Group (NYSE:RBS) ended all speculation about the future of its investment banking operations this Thursday with an announcement detailing the sweeping changes it intends to make to this ailing business. ((RBS group announces strategic and organisational changes in its investment banking/wholesale business, RBS Press Releases, Jan 12 2012)) While the announced restructuring of the investment banking business is not as profound as was rumored (see RBS May Cut 10,000 Investment Banking Jobs), it no doubt entails a significant shakes-up of the bank’s business model.

As was expected, RBS will let go of its equities business almost entirely -including its cash equities, corporate broking and equity capital markets operations. The group has also decided to do away with its M&A advisory arm. The restructuring process is expected to be completed over 3 years and would cut 3,500 jobs – in addition to the nearly 2,000 jobs RBS reportedly trimmed over the second half of 2011. The group’s revamp is expected to trigger changes in investment banking structures for many competitors including Barclays (NYSE:BCS) and UBS (NYSE:UBS).

We have a $9 price estimate for RBS’s stock – which is about 20% ahead of the current market price. We believe that this difference can be attributed to negative investor sentiment toward the stock market in general and the banking sector in particular in wake of the European debt situation.

See our full analysis for RBS here

The 82% state-owned RBS group was directed by the British government to scale down activities that require large amounts of capital last month. ((Britain pushes ahead with major bank shake-up, Reuters, Dec 19 2011)) The restructuring plan comes in response to this directive.

The biggest aspect of RBS’s restructuring plan is its decision to sell or close its cash equities, corporate broking, equity capital markets, and M&A businesses. The group mentioned that these businesses earned an income of just about £220 million ($340 million) over the first nine months of 2011, and their medium-term outlook does not look very bright. RBS is already in talks with potential buyers for these businesses and is looking to get them off its back as soon as possible.

RBS, however, reaffirmed its focus on the fixed-income trading operations.

The proposed changes will reduce the size of assets under RBS’s former Global Business Markets business – to be reorganized as the new Markets and International Banking business – from £420 billion ($645 billion) in mid-2010 to less than £300 billion ($460 billion) over the next 3 years.

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