Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at taxpayer-owned bank Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) — and what they mean for investors.
Five years on from the financial crisis, RBS has removed more than £1 trillion of assets from what was a bloated, risk-infested balance sheet of £2.2 trillion. The heavy lifting was done by Stephen Hester, who has now moved on to another clean-up operation at RSA Insurance.
New chief executive Ross McEwan, who took up the reins from Hester last October, delivered his first set of annual results in February. He talked of the work still to be done on getting the balance sheet into leaner shape, and of other changes he would be making to transform the bank.
Leaner shape
On results day, RBS announced it had completed the sale of its remaining interest in Direct Line Insurance Group. The sale of these assets was one of the conditions imposed on RBS by the European Commission when sanctioning the £45bn bailout of the bank by the UK government.
Another EC state-aid penalty requires RBS to sell 300-plus bank branches. A £1.6bn deal to sell these branches to Santander collapsed in 2012, but RBS said within the recent results that good progress has been made towards disposing of the assets by way of a stock market flotation under the Williams & Glyn brand.
Also up for a flotation — on the other side of the Atlantic — is RBS’s US banking subsidiary Citizens Financial Group, reckoned to be worth around £8bn. McEwan told us that preparations for a partial IPO in 2014 remain on track and that RBS intends to fully divest Citizens by the end of 2016. RBS describes this disposal as the “cornerstone” of its plan to get itself on a sure footing in terms of capital adequacy.
To this end McEwan has also created an internal “bad bank” of high-risk third party assets — currently standing at £29bn — which he aspires to remove from the balance sheet in three years.
Other changes
Another big change in the offing is “a significant reduction in costs and complexity”. While RBS has been dramatically downscaled, and is becoming, increasingly, a UK-focused bank, it still carries the complex structure and cost base of a global financial services group.
McEwan intends to collapse RBS’s seven operating divisions into three ‘customer businesses’, and to bring the group’s cost base down from over £13bn in 2013 to £8bn in the medium term.
The focus on three customer businesses reflects McEwan’s ambition to make RBS “number one for customer service, trust and advocacy, in every one of our chosen business areas by 2020”.
What does the future hold for investors?
There’s still a huge amount of work to do for RBS to get to where its chief executive wants the bank to be: McEwan’s 2020 vision takes us to more than 10 years after the financial crisis.
We know how the big asset disposals, aforementioned, will change the shape of the business, but slippages in timing could upset RBS’s targets. No one really knows — including McEwan — what the final go-forward RBS will look like, or when it will get there.
As things stand, the chief executive can’t even say how many of RBS’s activities will be fixed, closed or disposed of as the group transitions to its new set up of three customer businesses. McEwan also frankly admits that, “there will be more things from our past that come back to haunt us”, even if these will be fewer in number.
In short, the road ahead continues to be foggy for investors trying to put a valuation on RBS. I suspect that many buying shares are doing so in the simple hope that because RBS was hit hardest by the financial crisis, the potential bounceback is higher than for other banks.
