• Private-banking division has a 90 percent cost-income ratio
  • CEO Ross McEwan said to want to lower expenses early next year

Royal Bank of Scotland Group Plc, Britain’s largest taxpayer-owned lender, will prioritize cost cutting at its Coutts private bank in the U.K. in the first half of next year, a person with knowledge of the matter said.

Alongside cost reductions at the investment bank and its Irish Ulster Bank division, Chief Executive Officer Ross McEwan wants to lower expenses at the British private bank, according to the person, who asked not to be identified because the matter is confidential. The unit had a 90 percent cost-to-income ratio excluding restructuring, litigation and conduct issues in the third quarter, which management considers unacceptable, the person added.

RBS agreed to sell the international business of Coutts to Switzerland’s Union Bancaire Privee in March as the Edinburgh-based lender retreats from global operations to focus on consumer and commercial banking in the U.K. and Ireland. It kept the British part of the private bank, which includes Queen Elizabeth II among clients.

"Following the sale of our international business we are now focused on streamlining our processes and propositions to improve efficiency and ensure our business better meets the needs of our clients,” RBS said in an e-mailed statement on Monday. “This includes the optimization of operations, infrastructure and management to help increase simplicity and reduce costs."

“The revenue outlook remains bleak, therefore the key focus will be costs and how quickly it can fall out.” said Ian Gordon, an analyst at Investec in London with a buy rating on RBS shares. “With interest rates lower for longer, the market for deposits disappears, which makes for a poor market for a private bank.”

Win Clients

As well as trimming expenses, McEwan wants to see Coutts win more client referrals from the lender’s wider commercial and private-banking operation, of which it is a part, according to the person with knowledge of the matter. At present, Coutts isn’t as good as Adam & Co., the lender’s Scottish private bank, at winning RBS’s commercial customers, the person said. 

The entire private-banking unit has about 2,700 employees and reported a return on equity of 1.7 percent in the third quarter, below McEwan’s target for the measure of profitability across the group of at least 12 percent. Operating profit at the division was 15 million pounds ($23 million) in the three months to Sept. 30, the lowest of any unit aside from the investment bank.

Some cost reductions at Coutts are necessary following the disposal of the unit’s international operations, which removed about 32 billion Swiss francs ($32 billion) of assets under management, the CEO said on a call with analysts at third-quarter earnings.

“Taking out the international business has created quite a bit of cost and concentration for us,” McEwan told analysts in October. “We are having to close down parts of the operation, buildings, separate out the international from the go-forward Coutts business. Next year we should start to see the costs of that business coming down and a much more stable business.”

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