If 'banking intelligence' firm Tricumen is right, RBS's investment bank is far from being the most efficient in the world. It could probably do with cutting a few costs - and indeed, it intends to. In RBS's recently released 2015 annual report, the talk around the corporate and institutional banking business (CIB) was all about "multi-year transformation" and moves towards a "sustainable cost base."
A new chart on RBS's cost base from analyst Chirantan Barua at Tricumen illustrates what this might mean in practice. If you're in the CIB, it does not look pretty.
Source: Bernstein Research
As the chart above shows, in 2014 costs in RBS's corporate and investment bank were £1.6bn.
If RBS is to reach its cost-cutting target by 2017, Bernstein expects CIB costs to have fallen to £829m. By 2018, Bernstein expects costs to have fallen to £712m. That's a reduction of 56% in four years.
What happens to revenues over this period? In 2014, revenues at RBS's corporate and investment bank were £1.9bn. In 2015, they were £1.5bn. In future, Bernstein has downgraded its expectation for stable CIB revenues from £1.4bn to £1.1bn due to volatile markets and fee "headwinds."
The upshot is that revenues in RBS's CIB are expected to fall by 42% in four years as costs are cut by 56%. The British bank is an extreme case, but nonetheless a microcosm of the problem facing investment banks in Europe. In a shrinking market where the easy costs have already been cut, how do you make significant additional cost reductions without harming revenues proportionately? Answers to Ross McEwan please.