RBS Seen Ready to Deepen Investment Bank Cuts After Test Failure

  • U.K. lender failed most hurdles in Bank of England stress test
  • RBS is also preparing for cost cuts in Ireland, analysts say

U.K. Banking Jobs Are on the Chopping Block

Royal Bank of Scotland Group Plc will probably deepen cuts at its investment bank and its Irish business to boost capital after flunking Bank of England stress tests, according to analysts.

The Edinburgh-based lender may need to dispose of 44 billion pounds ($56 billion) of risk-weighted assets to improve its capital buffers, analysts at Barclays Plc led by Rohith Chandra-Rajan wrote in a note to clients on Thursday. RBS will probably cut costs at its Ulster Bank retail division in Ireland and the corporate and institutional bank, which houses bond underwriting and securities trading business, according to UBS Group AG.

“The current Irish efficiency position looks untenable,” UBS analysts led by Jason Napier in London wrote on Wednesday. After McEwan hired former Danske Bank A/S executive Gerry Mallon to lead Ulster Bank in June with a mandate to cut excess costs and improve returns, “the market will be looking for evidence of delivery in 2017.”

Chief Executive Officer Ross McEwan, 59, is coming under increasing pressure to return RBS to profitability and financial resilience eight years after the bank required a 45.5 billion-pound taxpayer bailout. On Wednesday, the U.K. lender agreed with regulators to revise its plans to bolster capital after failing the BOE’s annual health check. McEwan is on track to report RBS’s ninth straight annual loss in February, while looming charges for past misconduct and failure to sell its Williams & Glyn unit are undermining his turnaround efforts.

Ulster Costs

Ulster Bank has the highest costs in relation to revenue of any RBS business, at 101 percent in the first nine months of 2016. The lender was already focusing on cutting costs at Ulster Bank before the outcome of the stress test, according to John Cronin, an analyst at Goodbody Stockbrokers in Dublin.

Mallon said Thursday that Ulster Bank remains an “integral part” of RBS and has increased in “strategic importance” since the Brexit vote.

RBS has slashed risk-weighted assets at its investment bank by two-thirds to 36.6 billion pounds since the end of 2014 and the bank is also cutting costs from legacy computer systems built for a global securities division that no longer exists.

About 200 million pounds of annual expenses at the securities unit through 2020 come from investment to replace its IT system and enable the lender to cut administrative jobs, according to UBS.

Failed Test

RBS was the only U.K. bank to submit a revised capital plan to the BOE’s Prudential Regulation Authority. Its weaknesses stem from misconduct costs, potentially running into billions of dollars, from a U.S. probe into mortgage-backed securities, surging loan impairments and losses on the sale of its Williams & Glyn business.

For more on RBS’s stress test weaknesses, click here.

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