Another day, another piece of bad news related to Royal Bank of Scotland (RBS). Last week, the British bank had its credit outlook changed to negative by Standard & Poors. Today, the Times reports that RBS is planning to make some ‘dramatic job cuts’ in Asia.
Is this true? RBS declined to comment. However, banking analysts said any cuts will come as no surprise. “This would just be a further curtailment of their non-core activities,” said Ian Gordon, an analyst at Investec. “RBS is cutting 20% of the capital allocated to its investment bank. Asia is an obvious place for them to cut,” said Chris Wheeler, an analyst at Mediobanca.
Death by a thousand cuts
RBS has already made dramatic cuts to its investment banking business, particularly in Asia. After announcing 3,500 redundancies and the withdrawal from equities sales and trading and M&A in January 2012, the bank announced another 1,400 redundancies in May 2013. So far, RBS’s Australian business has borne the brunt of its cuts in the Asia Pacific region – RBS has closed Sydney as a trading hub (leaving Singapore, Hong and Tokyo) and shuttered its Australian fixed income currencies and commodities business. In what now looks like a leading indicator of trouble to come, Todd Morakis, global head of emerging markets trading at RBS left the bank in December 2012, and hasn’t been replaced.
Asian investment banking is a zero margin business
Even if another round of Asian job cuts at RBS is unsurprising, analysts say there are two reasons bankers at other firms should take note.
Firstly, the Times reports that RBS’s Asian business makes no profit: its return is zero. This is a perennial problem in Asia. As we’ve noted before, banks like Citigroup and JP Morgan have struggled to increase revenues dramatically in Asia and achieve slender margins compared to other regions. Standard Chartered said recently that the rising cost of staff in Asia was impacting its bottom line.
Wheeler points out that banks like Barclays have been disproportionately cutting staff in Asia too. “Banks still think that Asia is where the growth is but the problem is getting share in a market like Asia. It’s very competitive and the cost base is considerably higher there than people expected.”
Secondly, Wheeler points out that if RBS is pulling back from Asia, it’s because it lacks the scale to make its business there profitable. Succeeding in any area of investment banking now is about having sufficient scale to generate revenues that will cover your cost base. If RBS can’t make Asia work, Wheeler said this raises questions about the sustainability of other banks’ marginal business areas. Morgan Stanley’s fixed income business is a case in point. The US bank keeps insisting that it can sustain a small market share, said Wheeler in a separate note today. However, tough decisions at banks like RBS and UBS suggest Morgan Stanley may be forced to change its mind.