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.
Cutting costs in RBS’s corporate and investment bank
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.