As part of the process the bank is considering the sale or closure of its cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses, which are currently unprofitable.
RBS said it was talking to number of potential buyers, though there is no assurance of a sale being made. And although the changes would begin immediately, they may take up to three years to implement.
The market welcomed the bank's 10 point plan, pushing up RBS shares by 0.66p or 3% to 22.4p.
1. We will restructure our existing GBM and GTS Divisions: • The "Markets" business will maintain its focus on fixed income, with strong positions in debt capital raising, securitisation, risk management, foreign exchange and rates. It will serve the corporate and institutional clients of all Group businesses. • GBM's corporate banking business will combine with the international businesses of our Global Transaction Services arm into a new "International Banking" unit and provide clients with 'one-stop shop' access to our debt financing, risk management and payments services. This international corporate business will be self-funded through its stable corporate deposit base. • The domestic small and mid-size corporates currently served within GTS will be managed within RBS's domestic corporate banking businesses in the UK, Ireland (Ulster Bank) and the US (Citizens). 2. Our wholesale business will be retaining its international footprint to ensure that it can serve our customers' needs globally. We believe that despite current challenges to the sector, wholesale banking services play a central role in supporting cross border trade and capital flows, financing requirements and risk management and we remain committed to this business. 3. We are considering sale or closure options for our cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses which had income of c£220 million in the nine months to September 2011 and are currently unprofitable. We are in discussions with a number of potential buyers though there is no assurance of a sale concluding. We took this decision because we want to prioritise our resources on those businesses where we are best with customers and can operate most profitably for shareholders. We intend to retain our leading investor products business internationally in equity and fixed income derivatives. This business is both profitable and provides valuable funding for RBS. 4. We will continue to invest in our existing fixed income and currencies business and focus on delivering world-class customer service, risk management, IT systems and solutions. We will, however, reduce the usage of balance sheet and of unsecured wholesale funding within these businesses and also reduce areas where capital intensity is high, evolving our business model to support these activities but in a less balance sheet-intensive manner. 5. RBS's objective post-transition is for both its domestic and international corporate banking businesses to be wholly funded through corresponding deposits (i.e. c100% loan-to-deposit ratio). 6. The former GBM funded balance sheet is targeted to reduce by c£120 billion from c£420 billion as at 30 June 2011 to c£300 billion over the up to three year implementation period. Associated usage of unsecured wholesale funding is targeted to decrease by c£75 billion during the same period. RWAs and equivalents, post Basel III changes, at the end of the implementation period are expected to be less than £150 billion versus the c£225 billion previously indicated, of which the Markets business will aim for c£100 billion. 7. The Markets and International Banking businesses will be run in close alignment, and report to John Hourican, currently CEO of GBM. 8. Like all RBS core businesses, the two business units will target a return on allocated equity exceeding the cost of capital, currently estimated at 12%, in the medium term. 9. At this stage we envisage a further net employment reduction over three years of circa 3,500, split between our UK and non-UK locations, in addition to the approximately 2,000 reduction in staff in GBM in H2 2011. These proposals are of course subject to consultation with our various social partners in those jurisdictions impacted. 10. The revised wholesale strategy and structure is designed to help transition RBS toward ring-fencing requirements being legislated for UK banks.
Bruce Packard, analyst at Seymour Pierce, said: 'Our initial reaction is to question whether this is radical enough.'
'18 months ago we suggested to the chief executive that his life would be much easier if he span out the GBM division completely,' commented Packard, who has RBS under review.
Michael Symonds of Daiwa Capital Markets said that while the businesses being exited are currently unprofitable, their sale or closure is 'almost certain to come at a high cost'.
He added: 'Of course, the announcement of this dramatic shrinking of RBS' investment banking business should not come as a surprise given that it has been publicly called for by the bank's major shareholder – the UK government.'
The loss of the 3,500 jobs, which will be split between the bank's UK and non-UK locations, come in addition to the 2,000 jobs which the bank cut in the second half of 2011.
Commenting on the restructure RBS chief executive Stephen Hester said: ‘We launched the RBS recovery plan in 2009 with strategic tests for the businesses that the group would retain. They would be restructured and managed to sustain strong, customer driven competitive positions, return more than their cost of capital, use a proportionate amount of group resources and be closely connected with each other.
‘This strategy has succeeded in making RBS stronger and placing us on the road to long-term success. We have reduced our balance sheet by some £600 billion and have rebuilt capital ratios that place us among our strongest international peers.’
He added: ‘But for our strategy to be effective, it must adjust to fresh challenges. And it is clear that, particularly in the wholesale banking arena, significant new pressures have emerged. The changes we are announcing today seek to ensure that RBS is at the front of the pack in pursuing a strategy that reflects the environment we expect to operate in.
‘Our goal from these changes is to be more focussed for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall.’
The news comes after UKFI, the body in charge of the government's bank holdings, said yesterday that ‘it will inevitably take longer than originally expected’ to sell off RBS and Lloyds (LLOY.L).