Sign O’ The Times
I awoke recently to a somewhat alarming email from mymanaging editor-who is based in New York-saying that RBS was closing down its transaction services business. She picked up the story from serial blogger Chris Skinner’s Financial Services Club blog, which cited a Wall Street Journal article stating that “RBS plans to sell or wind down its cash management and trade finance businesses outside of the UK and Ireland.” Deeper probing into RBS’s 2014 annual report, which was published in February, did indeed suggest that the majority state-owned bank’s Corporate & Institutional Banking (CIB) business, which incorporates cash management and trade services, would be significantly scaled back from a global network spanning more than 38 countries to focus largely on Western European and UK corporate and financial institution customers.
An RBS spokesperson stated: “In line with the strategy announced in February 2014 to make RBS a smaller, more focused bank, we announced on the 26 February further changes to our CIB operations. These changes will see us become a stronger, safer and more sustainable business, more aligned to the needs of our core customers in the UK and Western Europe. As part of these changes, we plan to refocus our transaction services offering on our home market capabilities in the UK and Ireland.”
While that does not by any means suggest a complete withdrawal from transaction banking services, it does indeed indicate that RBS is going back to its roots, shaking off the recklessly expansionary legacy of former CEO Fred Goodwin, to become a largely domestic-focused bank with a domestic transaction services platform, although trading and distribution will be maintained in the US and Singapore as well as the UK. Client coverage teams will also be retained in a number of Western European countries, presumably the Netherlands as RBS did acquire Dutch bank ABN AMRO back in 2007, as well as key European markets perhaps such as France, Germany, Italy and Spain. However, Central and Eastern Europe, where the bank is present in countries like Moscow, Poland and the Czech Republic, could be one of the regions where RBS CIB retreats altogether (although back-office processing will be retained in Poland), alongside most of Asia and the Middle East, in order to achieve its target of a geographical footprint that spans just 13 countries instead of the 38 that exists today. Those parts of its international network which RBS CIB no longer has a use for will be presumably sold off or wound down. Local, regional and global players will no doubt swoop in to snap up that business.
Bank deleveraging and derisking in the wake of the 2008 global financial crisis is nothing new and RBS had already sold off some of its overseas assets including its Asian retail and commercial banking businesses following its state bailout in 2008. However, this latest move seems to be more about making the bank a more sellable proposition for the UK government, which held 80% of the bank’s total share capital as at 31 March, 2014. It is almost certainly about reducing its risk-weighted assets, which as CEO Ross McEwan pointed out in the bank’s 2014 annual report, would decline by 60% to £35 billion to £40 billion in 2019. In his letter to shareholders in the 2014 report, RBS chairman Philip Hampton said: “We now have considerably more high quality capital than we had when the financial crisis hit and this bank was bailed out by the taxpayer. But we need to meet and exceed the expectations of the Prudential Regulation Authority (PRA) and of our shareholders and bondholders. Stress test results show it’s not just how much capital you have, but how your balance sheet behaves under extreme economic scenarios.”
So regulatory pressures, the need for banks to maintain higher levels of quality capital and less RWA on their balance sheet, all measures which stem from the 2008 global financial crisis, have combined it seems, to sound the death knell for RBS’s international banking ambitions. Yet, we have not really seen a scaling back of this scale and nature before in global transaction banking, which throughout the 2008 crisis was viewed as a highly profitable and attractive business to invest in given its relatively low levels of volatility and higher price to earnings ratio, which helped keep banks afloat during difficult economic times.
RBS may be unusual in that it is still majority state-owned and has not fully restructured its business in the wake of the financial crisis. But it could be argued that the substantial scaling back of its CIB activities is a sign of things to come for transaction banking in general, particularly in a low-interest rate environment and with the ongoing need for transaction banks to invest in digital banking platforms and their international networks? Carole Berndt, former head of GTS at RBS, who was poached from Bank of America Merrill Lynch to run the business and has since departed for a new role at ANZ, seems to have had an inkling of what lay ahead when she issued her yearly guidance about the business back in January before her departure. She stated that banks were now looking to specialize—doing less but doing it better. “Some difficult decisions will have to be made,” she stated, “but most banks will emerge from this detox fitter and healthier, with fewer clients but deeper relationships.”
“It won’t be easy,” she continued. “Our new reality will see banks look to their core areas of expertise and then partner more to ensure the client’s need for global banking is still delivered. These won’t be the basic partnerships of the past; they will be fully integrated like those that have developed in the airline industry.”
Jerry Norton, vice president, financial services, CGI, says transaction banking is no longer for the faint hearted. “It is clear that there will be only a handful of very big global players (mostly the large, global US banks) that will have the reach to service the biggest corporates across the globe. Everybody else will be regional champions who will link up together to form a new generation of correspondent banking.”