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The relationship between the EU and Royal Bank of Scotland holds one of the most bitter ironies of Brexit for the UK banking industry. When Brexit actually happens two years from now, RBS might finally have navigated the many painful measures demanded by EU state-aid rules after its £45 billion ($56.7 billion) crisis-era bail-out – just as Britain leaves the bloc.
Just when RBS’s years of restructuring might be over, when it has stripped thousands of staff, billions of pounds of assets and businesses around the world – when it can concentrate on fine-tuning a new UK strategy – its home market could then be less attractive because of Brexit. In a worst-case scenario, peeved Scots could opt for independence, separating RBS’s Edinburgh headquarters from the bulk of its operations in England.
Whatever happens with the Brexit negotiations and the UK economy, RBS will be a complicating factor in talks with the EU. That is because the bank and its British government owner must still agree an alternative with the European Commission to its carve-out of Williams & Glyn, the tortuous method it had previously agreed to reduce its UK market share, particularly in small and medium-sized enterprises.
To meet its bail-out requirements, RBS has sold UK insurer Direct Line, payments firm WorldPay and US regional bank Citizens. These now are big businesses in their own right. But the pain of those sales cannot compare with the aborted resurrection of Williams & Glyn, a once partially Manchester-focused lender, RBS acquired in the mid 1980s. Fresh from spending £1.5 billion on the carve-out, only to find no suitable buyer, the bank might now have to reintegrate it.
The proposed alternative, although perhaps preferable, is nevertheless extraordinary. Essentially RBS would pay challenger banks to take its SME clients and allow them to use its branches and back office. Selecting clients to put in a new carve-out to sell to a competitor is unusual enough. It will be unnatural for commercially minded bankers to work so imaginatively to promote the competition.
The story of Williams & Glyn is typical of how handling not just the EU’s rules, but also the UK government’s whims, has overshadowed hard work and some genuine success in cleaning up the bank and turning RBS around.
Interference was most obvious in the departure of the former chief executive Stephen Hester after criticism by the then chancellor George Osborne at a Mansion House speech in 2013. Even if Osborne’s apparent wish for a smaller investment bank might have been right, the way he expounded it was disastrous for the bank’s commercial standing. Not long after, former business secretary Vince Cable also targeted Williams & Glyn, pressuring Hester’s successor Ross McEwan to hasten the sale.
To compare RBS’s management unfavourably with Lloyds – another UK-focused bank subject to similar state-aid rules – is therefore not always fair. Lloyds was simpler, stronger and more UK-centric when its restructuring began, despite merging with HBOS. It has been less of a focus for public anger since.
Lloyds made an early and correct decision to keep TSB (its retail-focused carve-out) on its own IT systems during an IPO and later under a service agreement with Spanish acquirer Banco Sabadell. RBS had hoped to sell its carve-out quickly to a Santander eager to grow in UK SME banking. But there should have been more recognition on all sides of how difficult it would be to separate thousands of back-office systems upfront, along with hundreds of branches.
McEwan and company, meanwhile, still have a lot of costs to cut in RBS’s investment bank, which is not even a shadow of its former self as NatWest Markets. Shrinking international and investment banking has been a much smaller job at Lloyds. Now, although RBS is still the biggest lender to British business, NatWest Markets must fall in line with its equivalent at Lloyds; modest services to UK corporate customers and perhaps the odd UK-related client elsewhere (principally in western Europe).
It is impressive that RBS has managed to survive at all, given its £50 billion-plus of losses. It helps that return on equity in its retail division is high, 28% on an adjusted basis, according to the bank. Its share of current accounts puts it in a far better position than the likes of TSB or even Santander. It has a high-ranking private bank in Coutts. Esme, its new online lender for businesses, shows it is not ignoring the threat to traditional banks.
But there are real hits to morale from the continued losses, public attacks and fiascos like Williams & Glyn. It is hard at the best of times to get Brits to sound optimistic, especially those from northern parts, yet there is a palpably downbeat atmosphere here. When there is certainty on the new state-aid measures – and when we know the size of an expected US fine for mortgage mis-selling – staff at RBS might appreciate a new CEO to give a sense of a break from the past.
A new headquarters in London might help, too.
For now, the ghost of Fred ‘the Shred’ Goodwin still stalks that old ABN Amro building on Bishopsgate.
