Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, is to cut about 4,800 jobs including 3,500 at the investment bank as it jettisons unprofitable units, citing volatile markets and the cost of new U.K. regulation.
RBS will sell or close the cash equities, mergers advisory, corporate broking and equity capital markets operations, and is in talks with “a number of potential buyers” for the operation, it said today in a statement. About a further 1,300 jobs are to be eliminated in other areas, including Ulster Bank and corporate lending, said a person with knowledge of the matter.
“We are pulling out of business areas that are unprofitable and where we have weaker customer positions than the market leading group of competitors,” Chief Executive Officer Stephen Hester, 51, said in a memorandum circulated to staff and confirmed by an RBS official. “We are also scaling back resources in areas where market developments threaten our ability to fund ourselves sustainably and profitably.”
RBS is reversing a decade of expansion to 2008, under former CEO Fred Goodwin, as regulators impose higher capital requirements and as the sovereign debt crisis erodes profitability and revenue at the investment bank. Today’s cuts will reduce employees at the securities unit led by John Hourican by 29 percent to 13,500 by 2015 as the Edinburgh-based bank focuses on fixed income, foreign exchange, debt financing, transaction services and risk management.
The bank gained 5.6 percent to 23 pence in London for a market value of 25.4 billion pounds ($39 billion) marking its biggest gain in six weeks. That was the eighth-highest rise in the 46-member Bloomberg Europe Banks and Financial Services Index.
The U.K. government-sponsored Independent Commission on Banking’s report last September proposed the insulation of consumer banking operations from investment banking, meaning banks will no longer be allowed to use their consumer units to provide cheap funding for investment banking. Chancellor of the Exchequer George Osborne in December also supported a scaling back of the investment bank to reduce the lender’s riskier activities and hasten a return to full private ownership.
In contrast to Goodwin’s $140 billion of acquisitions, Hester has already retreated from some markets in Asia, running off loans and selling units including the European division of commodities-trading business RBS Sempra, which JPMorgan Chase & Co. bought for $1.7 billion.
RBS favors selling its aircraft leasing division to Sumitomo Mitsui Financial Group Inc., which bid more than $7 billion, a person with knowledge of the matter said today. The 83 percent government-owned bank has announced almost 35,000 job losses since it was bailed out.
“RBS staff have faced endless speculation and uncertainty about their futures,” said David Fleming, National Officer of the Unite labor union. “Enough is enough.”
Europe’s sovereign debt crisis has forced securities firms to scale back or close divisions that trade equities on the continent. UniCredit SpA, Italy’s largest bank shut its European equities unit in November, joining a growing list of companies including Nomura Holdings Inc. that have eliminated jobs in the region.
RBS hired John McIntyre, the former head of mergers and acquisitions at Dresdner Kleinwort Ltd. in November 2008 to push into mergers advisory. Instead the firm went backward in the M&A league tables, from 15th in 2007 to 16th in 2009 and 20th in 2011, according to data compiled by Bloomberg. The value of mergers and acquisitions globally dropped from $4 trillion in 2007 to $1.77 trillion in 2009 and $2.28 trillion last year.
Hester’s plan is probably driven by “regulatory change in terms of ring fencing and also partly driven by political furore over the annual pay and bonuses,” said Simon Willis, an analyst at Daniel Stewart Securities Plc. “Dismantling the wholesale banking business should alleviate some pressure.”
The lender plans to reduce the size of the investment bank’s balance sheet over the next three years to 300 billion pounds from 420 billion pounds today, RBS said in the statement. The reductions will also reduce risk-weighted assets to less than 150 billion pounds. A further 2,000 jobs in investment banking were cut in the second half of last year, RBS said.
“We welcome this decision to further de-emphasize the company’s less profitable, riskier and more capital intensive operations,” Gary Greenwood, an analyst at Shore Capital in Liverpool. The reduction in risk weighted assets should free about 7.5 billion pounds of core Tier 1 capital assuming a 10 percent core Tier 1 capital ratio, he said.
The bank has also lost ground as an underwriter of share sales and initial public offerings. RBS was ranked 14th in equity capital markets in 2008, 10th in 2009, 20th in 2010 and 24th last year, according data compiled by Bloomberg. The businesses to be sold or closed provided 220 million pounds of income in the first nine months of last year and are unprofitable, the bank said.
The bank’s most recent results, for third quarter 2011, showed investment banking revenue slipped 29 percent to 1.1 billion pounds from the year-earlier period. Revenue in the securities unit’s credit operations declined 73 percent, fixed income and currencies slumped by 59 percent while equities slid 42 percent, RBS said.
RBS may have about 1 billion pounds of costs relating to the securities unit’s overhaul, wrote Robert Law, an analyst at Nomura Holdings Inc. in a note to investors. The job losses may bring annual savings of at least 750 million pounds, estimated Bruce Packard, an analyst at Seymour Pierce Ltd. in London.
RBS will divide its investment bank into Markets, which will focus on fixed income, and International Banking, to oversee debt financing, risk management and payment services, the bank said. The bank named John Owen and Scott Barton as co-chief executives of International Banking. Peter Nielsen continues as head of markets and both divisions will report to Hourican.
Other parts of the bank are also shrinking. RBS’s Irish unit, Ulster Bank Ltd., said it plans to eliminate 950 jobs. RBS also said yesterday it would cut 272 jobs at its U.K. Corporate banking unit, about 2 percent of total corporate banking workers, on slowing growth and volatility. The bank plans to cut 40 jobs within its wealth management unit, a person with knowledge of the matter said today.
“I am also conscious that other parts of the group are going through difficult people changes too,” Hester said in the memo. “Any decision to reduce roles is deeply regrettable and we will do all that we can to support the affected staff as best we can.”
Separately, Barclays Plc, the U.K.’s second-largest bank by assets, said today it was cutting 422 jobs in its British technology division.
RBS’s decision today has some similarities with Barclays, which in 1997 sold its Barclays de Zoete Wedd’s equities and advisory business for about 100 million pounds to focus on fixed income and foreign exchange, said Christopher Wheeler, an analyst at Mediobanca SpA in London. The retained division was renamed Barclays Capital.
“Both of them ended up with sub-scale equities businesses,” said Wheeler. “If you look at the track record for BZW, at a rather better time in the market, they had to give it away. The runes aren’t great for Royal Bank.”