It may not be politically appropriate to say so, but remember when RBS was a great trading house? When under Steve Ashley, the rates trading supremo now at Nomura, it was making a fortune in rates? Today’s RBS is a shadow of that colossal beast. It’s lost many of its best traders and hobbled the rest. And it didn’t really have to be this way.
In 2013, RBS’s global banking and markets business made an operating profit of £712m, down from £1.5bn in 2012. Sounds bad? It is. Back in 2009, the operating profit at RBS investment bank was £6.4bn. That’s a decline of 89% over five years.
RBS could have done with those profits today. The bank reported a firm-wide loss of £8.2bn for 2013, its biggest loss for six years thanks to a combination of PHP charges (£1.5bn), regulatory and legal costs (£2.4bn) and restructuring charges (£0.7bn).
Unfortunately, RBS has set about actively dismantling its previously profitable investment bank. Headcount in the business has gone from 18,700 in 2010 to 10,300 at the end of 2013. Many of the best traders and salespeople have followed Ashley across to Nomura, which is – unsurprisingly, doing very well indeed.
The traders who remain at RBS have been hobbled by the bank’s extreme risk aversion. Admittedly, RBS isn’t the only bank to have slashed risk-taking – JPMorgan cut risk (as measured by Value at Risk) by 50% last year – but the rates traders who were previously so important to RBS’s investment bank seem to have been particularly stung. VaR in RBS’s rates business was cut by 40% in 2013 vs. 2012, compared to a reduction of 18% across the bank’s markets business as a whole. The upshot? In an admittedly difficult market, rates revenues fell by 45% in 2013.
RBS has become an easy meal ticket
Where does this leave RBS’s investment bank now?
If you’re an employee, it looks like a mediocre-performing, unambitious, ok-paying place to be. Yes, RBS has cut pay – which was down another 11% to an average of £114k last year, but that’s still more than you’ll get working in any other industry.
Most importantly, RBS has decided not to expect too much of its investment bankers. It’s dumped the previous heads of its markets business and got a new CEO, Donald Workman, formerly chairman of the Asian business. As per the chart below, Workman has some distinctly unambitious targets to meet – a meagre 7-8% return on equity in the medium term and a mere 20% operating margin. This looks paltry when Credit Suisse is aiming for an ROE in its investment bank of 23%. It also looks paltry when you consider that RBS’s investment bank was making a return on equity of 9.6% as recently as 2012. RBS’s investment bankers can cruise. They have an incentive to stick around, take less risk, play Angry Birds and spend long amounts of time in the gym.
Strategic goals at RBS:
Ross McEwan will lay out the strategic imperatives for the bank at 2pm this afternoon. His presentation, which is already online, suggests he’s set to say that rates and FX trading remain core to the bank’s new customer-centric UK-focused future. And yet, as the chart below from analysts at Investec reiterates, the markets division is a shadow of its former self. It is in no shape to help pull RBS out of the profits-hole it now finds itself in, nor does there seem to be any expectation that it will do so. That’s a shame, but it’s good news for anyone who wants to collect £114k a year without having to strain.