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Jonathan J. Smith

Jack Bass

One of the two U.K. banks to be nationalized, Royal Bank of Scotland Group plc is a holding company that lost €28 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) (the other U.K. bank to be nationalized) and Barclays (BCS), as well as a handful of U.S. banks such as J P Morgan Chase (JPM).

From 2007 to 2008, RBS went from being the most capitalized bank in the U.K. to having their share prices 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.^[1] This caused changes in the bank's structure, as it hired a new CEO and plans to cut over 20,000 jobs.^[2] 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 HSBC Holdings (HBC) purchase of HBOS, ABN was filled with toxic assets. In Q109 alone, ABN had a €928 million loss.^[3] 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.^[4].

[edit] Business Financials

[edit] Global Banking & Markets (34.5% of Income)

The Global Banking & Markets segment provides debt and equity financing, risk management, and investing products to corporations and financial institutions. The segment is organized into four areas: RCC (rates , currencies, and commodities), equities, credit markets, and asset and portfolio management. From 2007 to 2008, Global Banking & Markets income decreased 6% due to losses in proprietary trading and counterparty exposure.^[5]

[edit] Global Transaction Services (8.4% of Income)

The Global Transaction Services provides global payments, cash and liquidity management, and commercial card products. The card business processes six billion transactions per year, worth £233 trillion.^[5] From 2007 to 2008, Global Transaction Services income increased 12% due to profitable cash management activity, which provides over one billion payments and collections annually.^[5]

[edit] UK Retail and Commercial Banking (36.5% of Income)

The UK Retail and Commercial Banking segment provides retail, commercial, and corporate banking products to U.K. citizens. UK Retail serves over 15 million personal customers and holds 26% market share.^[5] UK Retail market share for mortgage lending increased 2% to 19%.^[5] From 2007 to 2008, UK Retail and Commercial Banking income increased 2%.^[5]

[edit] US Retail and Commercial Banking (10.1% of Income)

The US Retail and Commercial Banking segment provides retail, commercial, and corporate banking through its brands Citizens and Charter One. In 2008, Citizens was tanked the 10th - largest commercial bank in the U.S. based on deposits.^[5] From 2007 to 2008, US Retail and Commercial Banking income increased 8%. Operating profit fell by 57% due to $972 million, however, due to credit spreads widening and unemployment rising.^[5] The commercial banking segment was able to profit from increased volatility, as customers were more motivated to manage risk.

[edit] Europe & Middle East Retail and Commercial Banking (5.1% of Income)

The Europe & Middle East Retail and Commercial Banking segment provides commercial and retail banking through its Ulster Bank brand in Ireland and RBS's presence throughout Europe. Ulster Bank will merge with First Active bank by the end of 2009.^[5] In Ireland and the UAE alone, over 289,000 personal credit accounts were opened in 2008. From 2007 to 2008, Europe & Middle East Retail and Commercial Banking income decreased 5%, and operating profits decreased 85% due to weak economic conditions.^[5]

[edit] Asia Retail and Commercial Banking (2.6% of Income)

The Asia Retail and Commercial Banking segment provides retail banking, cards and consumer finance, and international wealth management . The segment operates in India, Pakistan, China, Taiwan, Hong Kong, Indonesia, Malaysia, and Singapore. From 2007 to 2008, Asia Retail and Commercial Banking income increased 12%, driven by cards and consumer finance income growing 20%.^[5]

[edit] RBS Insurance (2.6% of Income)

RBS Insurance is the second-largest general insurer and largest personal lines insurer in the U.K.^[5] The segment's brands include Direct Line, Churchill and Privilege, NIG, and Green Flag. From 2007 to 2008, RBS Insurance income increased 12%, driven by its international business income growing 24%.^[5]

Despite growth in net interest income, RBS total income decreased from 2007 to 2008 due to increases in loan loss provision.‎

With the UK heading for a potential recession, RBS hopes to expand interantionally.

[edit] Trends and Forces

[edit] RBS becomes nationalized by U.K. government.

In October 2008, amidst the "eye of the crisis storm," Royal Bank of Scotland accepted nationalization by the UK government.^[1] RBS has 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 the U.K. government decided it needed to nationalize the bank to prevent a bigger crisis.^[6] At the time of nationalization, RBS had already written down £6 billion due to subprime lending.^[6] The nationalization plan consists of a £20 billion capital injection, the UK taking 60% ownership of the bank, and the UK buying £5 billion in shares at 12% interest.^[1] Bearish analysts believe that RBS still needs to clean up its £991 billion derivatives portfolio.^[7]

RBS had its largest corporate loss at £28 billion last year. In response, the bank's CEO Steven Hester plans to cut £1 billion per year by selling assets, reducing lending, and cutting 20,000 jobs.^[2] Hester has been scrutinized in June 2009 for talks of receiving a £9.6 million bonus, even thought the bank is under government control.^[8] As of 05/19/09, UKFI held 70% share of RBS and 43.5% share of the other U.K. bank to be nationalized -- British rival LYG^[9]

[edit] U.K. Banks have been Hit just as Hard as U.S. Banks.

It is common knowledge that 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.^[10] U.K. banks have U.S. commercial real estate exposures -- in the form of loans and other debt mortgage-backed securities (MBS).^[11] 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 recession in 2009.^[4] 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.^[4] U.K. GDP has decreased 33% since the end of 2007.^[4] U.K. unemployment reached 1.54 million in May.^[12] The Confederation of British Industry predicts that U.K. unemployment will peak at 3.03 million (9.6% of U.K. population) by Q310^[12] 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^[4] and housing prices have fallen 20% in that time span.^[13]

The U.S. is not the only country suffering from a crisis, as European banks suffered in 2008 as well.

[edit] RBS Suffers from Joint Take-over of ABN Amro Holding N.V. (ABN).

In October of 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.^[14] RBS paid €71 billion in the deal and gained ABN's North America, European, and Asian busnesses.^[15] 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.^[15] At the time, RBS was interested in ABN for the bank's market share in the promising Dutch economy.^[16]

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 it's stake in September 2008.^[14] In addition, the RBS's Amro business had a €928 million loss in Q109 alone.^[3] The ABN business is cleaning up it's portfolio, as its Tier 1 Capital Ratio increased from 10.9% to 12.7% in Q209 -- largely in part to RBS's €3 billion capital injection.^[3] RBS CEO Steven Hester is considering all options to revert back to a low-risk, UK-focused bank.^[17] Hester does want to have some international presence, however, to hedge against the struggling UK economy.^[17]

[edit] Competition

• Barclays (BCS) -- London-based BCS is the top British bank rival to RBS.^[18]
• HSBC Holdings (HBC) -- HBC is another U.K. bank that was crushed by the 2008 Financial Crisis.^[19]
• Lloyds Banking Group (LYG) -- LYG is another U.K bank that competes with RBS for customers in the Retail and Commercial Banking businesses.^[20]
• Citigroup (C) -- Citigroup offers similar banking products as RBS, and has lost money in five straight quarters.^[21]
• Bank of America (BAC) -- BAC is a bank holding company that competes with RBSfor U.S. consumers.^[22]
• J P Morgan Chase (JPM) -- Like BAC, JPM also offers credit provision and investment banking products while competing with RBS for U.S. consumers.^[23]

• Note: BCS, LYG, and RBS financials are given in £. For purposes of comparison, the BCS, LYG, and RBS data in this table was translated to USD using the average USD/GBP exchange rate for 2008 (1.85251) USD/GDP).^[30]

[edit] References

1. ↑ ^{1.0 1.1 1.2} Financial Post, "RBS Hands Keys to U.K. Government," 10/13/08
2. ↑ ^{2.0 2.1} The Sunday Times, "Radical Revamp Splits RBS in Two," 02/22/09
3. ↑ ^{3.0 3.1 3.2} Wall Street Journal, "UPDATE: ABN Amro 1Q Loss; Will Separate RBS Ops By Year-End," 05/25/09
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} Seeking Alpha, "Is U.K. Headed for an Even Worse Great Depression? (Part 1 of 3)," 02/18/09
5. ↑ ^{5.00 5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 5.09 5.10 5.11 5.12} RBS 2008 Annual Report
6. ↑ ^{6.0 6.1} Times Online, Royal Bank of Scotland under state control," 10/13/08
7. ↑ Seeking Alpha, "RBS: A Royal Mess," 02/26/09
8. ↑ Bloomberg, "RBS Chief Hester May Get 9.6 Million Pounds in Pay," 06/22/09
9. ↑ WSJ, "Lloyds, RBS Shares Higher On Possible Offloading By UK Govt," 05/19/09
10. ↑ Seeking Alpha, "These European Nations Are in Worse Shape than the U.S.," 06/15/09
11. ↑ Seeking Alpha, "Second Stress Wave for European Banks," 04/23/09
12. ↑ ^{12.0 12.1} Bloomberg, "U.K. Unemployment Rises Less Than Economists Forecast," 06/17/09
13. ↑ Seeking Alpha, "U.K. Housing Still a Risky Buy," 06/21/09
14. ↑ ^{14.0 14.1} "Royal Bank of Scotland Hit Hard Despite Bailout Rumors," 09/29/08
15. ↑ ^{15.0 15.1} "RBS emerges victorious in fight for ABN Amro," 10/08/09
16. ↑ Domain-B.com, "Royal Bank of Scotland- Fortis- Santander consortium acquires ABN Amro in worlds biggest banking takeover," 10/11/07
17. ↑ ^{17.0 17.1} The Independent, "RBS looks to sell ABN Asia and Charter One," 02/20/09
18. ↑ Barclays 2008 Annual Report
19. ↑ ^{19.0 19.1} HSBC 2007 Annual Report
20. ↑ LYG website, "About Us"
21. ↑ Citigroup website, "About"
22. ↑ Bank of America website, "About"
23. ↑ J.P. Morgan website, "About Us"
24. ↑ Reuters, Financial Statements, "RBS"
25. ↑ Barclays 2007 Annual Report
26. ↑ Citigroup 2007 Annual Report
27. ↑ BAC 2007 10-k, Item 6: Selected Financial Data
28. ↑ JPM 2007 10-k, Item 6: Selected Financial Data, page 14
29. ↑ Reuters, Financial Statements, "LYG"
30. ↑ USD/GDP Exchange Rates