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Hostage to fortune

12 August 2019 By Christopher Thompson

Royal Bank of Scotland has spent a decade winding down its volatile investment bank. Its managers hope to focus on steady-eddy UK retail and commercial banking. If only. Appointing insider Alison Rose to replace outgoing Ross McEwan makes sense, but economic and political headwinds will keep her hands tied.

Rose is a 25-year veteran of RBS. Presently CEO of the commercial bank, she has held senior positions in the investment bank and private lender Coutts. In other words, a consummate insider.

If media reports of her imminent appointment prove accurate, she will be the first woman to lead a major UK bank. She will also have beaten out Mark Bailie, another insider who applied for the top role, according to a person familiar with discussions. Bailie, currently chief executive of Bó, the all-digital bank of RBS’s NatWest operation, was at the centre of RBS’s transformation to humdrum high street lender.

That job is all but done, so the board under Chairman Howard Davies is looking to the future. While Davies said the bank would consider outsiders, the proposition was not compelling. The UK government’s 62.4% stake has kept pay low by industry standards. McEwan’s 3.6 million pound remuneration in 2018 was just over half the 6.3 million pounds awarded to his opposite number at Lloyds Banking Group.

Besides, there is not that much for an ambitious newcomer to do. RBS is too big to gain much market share and it doesn’t need shaking up – the lender made a semi-decent 7.5% underlying return on tangible equity in the first half of 2019. What it requires is careful calibration in a tricky environment. UK economic growth is faltering, lending margins are under pressure and the threat of Brexit adds uncertainty.

ROTE could realistically rise to a more respectable 10%. What is required is revenue of 12.5 billion pounds, a 27% tax rate, and a reduction in core costs to around 6.7 billion pounds by the end of next year, according to a Breakingviews calculation.

Rose’s room for manoeuvre will be limited by RBS’s near-utility status. Still. improving returns would give shareholders something to cheer about.


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