Auld lang syne
It’s back to the future for Royal Bank of Scotland’s investment bank. The UK government has said the state-backed bank should further shrink its wholesale arm and focus on serving UK companies. The outcome could be something resembling County NatWest, the UK progenitor of RBS’s current Global Banking & Markets (GBM) unit. But that could hardly be called a proper investment bank.
RBS has been hacking away at GBM, which now accounts for just a third of core profit, and it hasn’t finished chopping. Still, the government clearly wants a more radical retreat. RBS’s current approach is to eliminate businesses that face funding challenges or can’t earn their cost of capital. It now looks like RBS must apply a “Union Jack” test: does this business support domestic economic activity?
The equities business, which is loss-making according to someone familiar with the division’s numbers, looks likely to be the next casualty of the shake-up. It may not be hugely capital consumptive, but RBS has never been a strong player – it generated a sixth of the revenue that industry-leader Goldman did in 2010, according to JPMorgan analysts. Equity capital markets and advisory, including its Hoare Govett UK corporate broking arm, would follow. That’s ironic, since Hoare’s retains a strong following in UK Plc, despite its owner’s travails.
RBS’s relative strength has historically been in credit. But if the preference for UK business is to be respected, RBS might have to offload the former Greenwich Capital Markets business in the United States. That could dent returns: FICC is a scale business.
These disposals would leave RBS’s investment bank a London-centred debt house offering some limited corporate finance advice, foreign exchange, hedging, debt capital markets, and trade finance in addition to loans to a domestic client base.
Backtrack 25 years and County NatWest looked not much different – only it had a small UK-focused stockbroking arm. But County NatWest wasn’t a great success, hence its forced expansion into the global – although not much more successful – business that was NatWest Markets. The notion of a pure UK investment bank looks even less viable now than in 1987. But the government is paying this particular piper and it will call the tune, however off-key.