Photographer: Andrew Harrer/Bloomberg

RBS Shows Tech Nightmares as Scottish Branches Spur Delay

  • Williams & Glyn spin off delays new products for RBS clients
  • CEO says he’s never seen ‘anything this complicated’ before

When Royal Bank of Scotland Group Plc agreed to sell Williams & Glyn in 2009, it hoped to do so within months. Almost seven years later, it’s still struggling to divest the unit, with a tangled web of technology causing six branches scattered across its home country to become a major issue.

Chief Executive Officer Ross McEwan’s saga to separate the consumer unit is facing difficulty from the handful of NatWest branches in Scotland, including one in the hometown of national poet Robert Burns, that operate on different systems than the rest of the unit, according to people familiar with the matter. They add to complications that are causing spiraling costs, new products to be put on ice, and a longer wait for dividends.

The best laid schemes of McEwan and his predecessor Stephen Hester are being held back by technology systems that have been patched together and modified over decades. Even though RBS is spending about 50 million pounds ($72 million) a month on spinning off the branches, it risks missing a European Union deadline to divest the unit. The oft delayed effort illustrates the challenge the largest global banks face in bringing crumbling tech infrastructure into the 21st century.

“The time it takes to do some of these major steps of recreating all of the systems of our bank into the new bank, I haven’t seen anything this complicated anywhere before,” McEwan, 58, told reporters at the bank’s annual shareholder meeting in Edinburgh this month. “The more you get into one of these extractions the more you find.”

The stock was little changed at 211.2 pence at 11:06 a.m. in London, having fallen about 30 percent so far this year. That’s the worst loss among major British lenders. The shares remain below the 407 pence average price the U.K. government paid to rescue RBS in the financial crisis at a cost of 40.5 billion pounds to British taxpayers.

In 2009, Britain’s biggest government owned lender agreed to sell the 314 branches as a condition set by the EU for its bailout during the financial crisis. The separate unit would represent about 14 percent of RBS’s total branch network and have a 5 percent share of the U.K. market for small-and medium-sized business lending and mid-corporate banking.

Efforts to offload the branches through a sale or initial public offering have suffered a series of setbacks since the EU mandate. The most notable was in October 2012 when Spain’s Banco Santander SA abandoned its bid originally agreed in 2010, citing completion delays. Britain subsequently had to ask the EU to extend an initial deadline to divest the outlets by 2014. Last month, the U.K. bank warned it may miss the current timetable to sell Williams & Glyn by the end of 2017.

‘Dividend Drought’

“The delay of the spin-off kicks dividend payments into the long grass, and probably means investors will have endured a decade-long dividend drought before the bank starts making payments again,” Laith Khalaf, senior analyst at Hargreaves Lansdown said in an e-mail.

The NatWest outlets in Scotland are run on a separate IT system to 308 RBS branches in England and Wales also earmarked to form part of Williams & Glyn, said the people with knowledge of the matter. That’s just one factor complicating the disposal process, said the people who asked not to be identified because the details are private.

Product Delay

With such a focus on Williams & Glyn, the bank has been unable to offer some products to its own customers because it would complicate the task of copying its computer systems, said one of the people. That includes mobile-phone loan applications, available to NatWest clients, but not to RBS customers.

Led by RBS Chief Administrative Officer Simon McNamara, the bank has cut the number of systems to be transferred to about 700 from more than 1,000. The unit needs them to run about 190 products from checking accounts to small business loans, including old services no longer offered by RBS.

While RBS’s mandate to build a new unit by a deadline is unique, it’s technology issues aren’t. Many global lenders have what experts call “spaghetti balls’’ of overlapping and often incompatible platforms and programs to rip out or upgrade. Deutsche Bank AG is trying to cut its 45 different operating systems across the company to four, all while moving thousands of applications to cloud computing services.

It will take longer to create a standalone computer system for Williams & Glyn than to continue to administer the loans after a sale before transferring them to the buyer, as Lloyds Banking Group Plc chose to do when it sold its TSB unit. RBS took this option because it offers the “best long-term solution,” McEwan told reporters at the AGM. RBS could still pursue the route taken by Lloyds or find a buyer with similar computer systems to Williams & Glyn and allow customers to migrate to the bank, the Sunday Telegraph reported.

Financial Drag

There’s a financial burden from the delay too, with 6,000 people working to create the new unit. Though RBS benefits from cash generated by the Williams & Glyn, the disposal costs will probably be “significantly greater” than the 1.6 billion pounds it had planned for, RBS has said. That could exceed the amount the unit would fetch in a sale or initial public offering. In the seven years since RBS agreed to separate the branches to bolster competition, smaller British lenders such as Metro Bank Plc have opened and gone public.

“You could have almost have built a new bank from scratch in that time,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, England with a buy rating on RBS shares. “It staggers me that it’s taking as long as it is.”

The Williams & Glyn project also runs the risk of distracting management from other tasks such as meeting the Bank of England’s ringfencing rules by 2019, the lender warned in its annual report. Meanwhile, the slow progress could also harm the prospects for a sale, the heads of some of the small British banks eyeing the disposal have said.

RBS doesn’t include the NatWest assets when it gives details of the financial performance of the division and also excludes the technological costs and funding expenses it would incur as a standalone bank. With about 2 million customers and 24.2 billion pounds of assets, the consumer and commercial lender had a pretax profit of 101 million pounds in the first quarter.


“At the moment it doesn’t look like there’s a business yet that’s available for anyone to look at,” Virgin Money Holdings Plc CEO Jayne-Anne Gadhia said in an interview in March. “When the process happens we might consider it, but at the moment there is no process.”

Potential buyers include Banco Santander SA, according to people familiar with the matter. “We will continue to analyze opportunities in our core 10 markets where they add value,” a Santander group spokesman said. “That said, we do not comment on rumors or market speculation."

U.K. lenders CYBG Plc and Secure Trust Bank Plc have said they could be interested.

“I don’t think they’re in a position to start a sale process,” Secure Trust CEO Paul Lynam, who previously ran small business lending at RBS, said in an interview in March. “They’re not yet in a position to say when they will be able to hand over the IT platform. We may be interested in going through that process, but at this stage until we know a little more we can’t make a judgment.”

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