Royal Bank of Scotland Group plc (LON: RBS), one of the three U.K. banks to be nationalized, is a holding company that lost €23 billion in 2008 due to the financial crisis. The bank provides lending and commercial banking, and competes with other U.K. banks such as Lloyds Banking Group (LYG) (another nationalized U.K. bank), and Barclays (BCS), as well as a handful of U.S. banks such as JP Morgan Chase (JPM).
From 2007 to 2008, RBS went from being the most capitalized bank in the U.K. to having its share price drop 87%. The U.K. government stepped in and injected £20 billion while also taking 60% ownership of the bank and buying £5 billion in shares at 12% interest. This caused changes in the bank's structure, as it hired a new CEO and plans to cut over 20,000 jobs. The primary reason for the bank's downfall was it's $101 billion joint purchase of ABN Amro Holding N.V. (ABN) in late 2007. Like rival Lloyds Banking Group's purchase of HBOS, ABN was filled with toxic assets. In Q1 2009 alone, ABN had a €928 million loss. Although RBS has worked hard to make its portfolio less risky by selling assets and reducing lending, analysts think that the UK will be in a recession for years to come..
The Royal Bank of Scotland Group is the holding company of a global banking and financial services group. The Company operates in the United Kingdom, the United States, and internationally through its two principal subsidiaries, The Royal Bank of Scotland plc (the Royal Bank) and National Westminster Bank Plc (NatWest). Both the Royal Bank and NatWest are United Kingdom clearing banks. The Company’s business segments include: UK Retail, UK Corporate, Wealth, Global Banking and Markets (GBM), Global Transaction Services, Ulster Bank, US Retail and Commercial and RBS Insurance.
On December 31, 2009, the Royal Bank and NatWest had 649 and 1,612 retail branches, respectively, in the United Kingdom. Ulster Bank has 238 branches and a network of business banking offices across Northern Ireland and the Republic of Ireland. US Retail & Commercial had 1,512 retail banking offices (including in-store branches) covering Connecticut, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont.
Second Quarter 2010 Results
The Royal Bank of Scotland Group reported a 2010 second quarter operating profit of £869 million, up from £713 million in the first quarter of 2010. The group posted attributable profit of £257 million for the quarter. Group net interest margin was 2.03%, up 11 basis points relative to the first quarter, led by the Core retail and commercial businesses, where net interest margin (NIM) expanded by 14 basis points. However, the bank's Global Banking & Markets segment declined from a strong first quarter.
The bank's core Tier 1 capital ratio stood at 10.5% in June 2010, compared with 10.6% at 31 March 2010. The recent EU-wide stress tests confirmed that RBS remains well capitalied, with a strong Tier 1 capital ratio under both the benchmark and adverse scenarios.
UK Retail offers a range of banking products and related financial services to the personal market. It serves customers through the RBS and NatWest networks of branches and automated teller machines (ATMs) in the United Kingdom, and also through telephone and Internet channels.
UK Corporate is a provider of banking, finance, and risk management services to the corporate and small medium enterprises (SME) sector in the United Kingdom. It offers a range of banking products and related financial services through a nationwide network of relationship managers, and also through telephone and Internet channels. The product range includes asset finance through the Lombard brand.
Wealth provides private banking and investment services in the United Kingdom through Coutts & Co and Adam & Company. It also provides offshore banking through RBS International, NatWest Offshore and Isle of Man Bank, and international private banking through RBS Coutts.
GBM is a banking partner to corporations and financial institutions around the world, providing an extensive range of debt and equity financing, risk management and investment services to its customers. The division is organized along six principal business lines: money markets; rates flow trading; currencies and commodities; equities; credit markets and, portfolio management and origination.
Global Transaction Services segment helps customers to manage their cash and liquidity, and to make and receive payments. Its businesses trade finance, merchant acquiring, corporate card services and cash management are closely linked to other parts of RBS, notably Corporate Banking, Citizens, Ulster Bank and GBM.
Ulster Bank is the retail and commercial bank in Northern Ireland. It provides a range of financial services through both its Retail Markets division, which has a network of branches and operates in the personal and bancassurance sectors, and its Corporate Markets division, which provides services to SME business customers, corporates and institutional markets.
U.S. Retail and Commercial provides financial services primarily through the Citizens and Charter One brands. U.S. Retail and Commercial is engaged in retail and corporate banking activities through its branch network in 12 states in the United States and through non-branch offices in other states.
RBS Insurance sells and underwrites retail and SME insurance over the telephone and Internet, as well as through brokers and partnerships. Its brands include Direct Line, Churchill and Privilege, which sell general insurance products direct to the customer, as well as Green Flag and NIG. Through its international division, RBS Insurance sells general insurance, mainly motor, in Germany and Italy. The Intermediary and Broker division sells general insurance products through independent brokers.
In March 2010, Royal Bank of Scotland sold its wholesale banking operations in Colombia (RBSC) to The Bank of Nova Scotia. On January 14, 2009, RBS, through its subsidiary, RBS China Investments S.a.r.l, sold its entire 4.26% stake in Bank of China. In March 2010, Australia and New Zealand Banking Group Limited (ANZ) acquired the Company's retail and commercial businesses in Hong Kong. In April 2009, ANZ completed the acquisition of the Company’s Taiwan businesses. In May 2010, ANZ acquired the Company’s retail and commercial businesses in Singapore. In July 2010, Sempra Energy and Royal Bank of Scotland Group plc completed the sale of select operations of their RBS Sempra Commodities joint venture to J.P. Morgan, the investment banking arm of JPMorgan Chase & Co. In July 2010, GE Capital acquired RBS Factoring GmbH from The Royal Bank of Scotland plc.
In October 2008, amidst the "eye of the crisis storm," Royal Bank of Scotland accepted nationalization by the UK government. RBS had been the largest bank in the U.K. by assets, so when some of the bank's assets turned into toxic (non-performing) assets, the U.K. government decided it needed to nationalize the bank to prevent a larger crisis. At the time of nationalization, RBS had already written down £6 billion due to subprime lending. In the economic aftermath, Her Majesty set up the United Kingdom Financial Investment fund to assist nationalized banks (RBS, LYG, and the bankrupt Northern Rock). The nationalization plan initially consisted of a £20 billion capital injection, the UKFI taking 60% ownership of the bank, and the UKFI buying £5 billion in shares at 12% interest. Bearish analysts believe that RBS still needs to clean up its £991 billion derivatives portfolio.
RBS had its largest corporate loss at £23 billion in 2008. In response, the bank's CEO Steven Hester planned to cut £1 billion per year by selling assets, reducing lending, and cutting 20,000 jobs. Hester has made these cuts to move forward, but he was scrutinized in June 2009 for talks of receiving a £9.6 million bonus, even thought the bank is under government control. The cuts have not improved the bank's turmoil; the UKFI held a 70% share of RBS and 43.5% share of the other U.K. bank to be nationalized -- British rival LYG Hester hopes that RBS can survive this recession, so the bank does not have to be 100% nationalized, like Northern Rock.
U.S. banks, such as Bank of America (BAC), Citigroup (C), and Lehman Brothers (LEH) have suffered millions in losses due to the 2008 Financial Crisis. U.K. banks have not been immune to the U.S. crisis, as the U.K. government has invested €781.2 billion, compared to ~ €9.1 trillion ($12.8 trillion) invested by the U.S. government. U.K. banks have U.S. commercial real estate exposures -- in the form of loans and other debt mortgage-backed securities (MBS). So hardships in the U.S. housing market and banks suffering losses due to subprime lending in turn causes foreign banks to suffer losses.
Some analysts suspect that the U.K. is doomed for a bigger recession than the U.S. in 2010. U.K. GDP has decreased 33% since the end of 2007 and unemployment reached 1.54 million in May. The Confederation of British Industry predicts that U.K. unemployment will peak at 3.03 million (9.6% of U.K. population) by Q310 On top of all that, the U.K. housing market has been miserable -- as mortgages to home buyers dropped 49% since the beginning of 2008 and housing prices have fallen 20% in that time span. In efforts to reduce the downfall, the U.K. government is on pace to lend over £1 trillion to bailout banks in 2009, which it hopes will boost lending, but may just cause a bigger debt bubble. Investors might want to look further than "across the pond" for economic optimism.
In October 2007, RBS, Fortis (FORB-BT), and Banco Santander Central Hispano, S.A. (STD) jointly acquired the Amsterdam-based bank ABN Amro Holding N.V. (ABN). At the time, the $101 billion deal was the largest bank acquisition in history. RBS paid €71 billion in the deal and gained ABN's North America, European, and Asian businesses. The deal did not come easily, as the banks battled with Barclays (BCS) for 6 months, before ABN eventually declined BCS's €67.5 billion offer. At the time, RBS was interested in ABN for the bank's market share in the promising Dutch economy.
ABN, which specializes in consumer lending, added millions in toxic assets to RBS's portfolio during the 2008 Financial Crisis. The acquisition has proven to be disastrous for RBS, as the bank's share prices declined 24% when Fortis announced it was selling its stake in September 2008. In addition, the RBS's Amro business had a €928 million loss in Q1 2009 alone. The ABN business is cleaning up its portfolio, as its Tier 1 Capital Ratio increased from 10.9% to 12.7% in Q2 2009 -- largely due to RBS's €3 billion capital injection. RBS CEO Steven Hester is considering all options to revert back to a low-risk, UK-focused bank. Hester does want to have some international presence to hedge against the struggling UK economy.
|Competition||Royal Bank of Scotland (RBS-LN)||HSBC Holdings (HBC)||Barclays (BCS)||Citigroup (C)||Bank of America (BAC)||J P Morgan Chase (JPM) ||Lloyds Banking Group (LYG)
|Net Interest Income $Mil||47,131.56||42,563.00||21,246.44||53,692.00||45,360.00||38,779.00|| 32,546.75
|Loan Loss Provision ($Mil)||11,876.44||24,937.00||10,038.75||33,674.00||26,825.00||20,979.00|| 5,579.76
|Net Income ($Mil)||(42,541.04)||5,728.00||8,117.70||(27,684.00)||4,008.00||5,605.00|| 1,517.21
|Total Assets ($Mil)||4,449,080.64||2,527,460.00||3,803,165.98||1,938,470.00||1,817,940.00||2,175,052.00|| 807,755.49
|Total Liabilities ($Mil)||4,340,004.85||2,433,870.00||3,735,327.06||1,796,840.00||1,640,890.00||2,008,168.00||790,354.87|