The Royal Bank of Scotlands newly-installed chief executive Stephen Hester has today unveiled details of an overhaul at the troubled UK bank, which includes the divestment of hundreds of billions worth of assets over the next five years as it bids to reverse its fortunes and return to profitability.
Hester, along with UK Financial Investments Ltd, the body that manages the UK Government's shareholdings in banks, is hoping to draw a line under the steady decline at RBS which was triggered on the eve of the credit crunch by the mistimed acquisition of Dutch financial services group ABN Amro.
RBS, which is 68% owned by the UK taxpayer, will be split into a good bank-bad bank structure - or core and non-core in RBS parlance - with up to a quarter of the global business put up for sale. Hester confirmed there would be a tightened focus on domestic markets and a retreat from many international operations.
RBS said in today's statement: "It is intended that our representation in approximately 36 of the 54 countries we operate in around the world will be significantly reduced or sold. We will remain strong in all our major existing global hubs, however."
The good bank will constitute its UK and US retail divisions, its insurance business, and the Asian investment banking franchise largely made-up of ABN Amros operations in the region.
The bad bank comprises assets worth up over $400bn (314bn), or roughly a quarter of the banks total balance sheet, and includes the retail and commercial banking operations in Asia and Australia.
RBS declined to outline which specific businesses will be sold, but said the bulk of the disposals will come from within the Global Banking and Markets division.
Analysts predict other parts of the business could also be placed on the block, including corporate broker Hoare Govett, some US assets, wealth manager and private bank Coutts, and insurance brands including Directline and Churchill.
While the landscape may not be conducive to achieving decent valuations for these divestments, all serious offers will undoubtedly be considered by a bank seeking a return to full private ownership as soon as possible.
RBS Asia:
Hester is likely to look to selectively offload the banks retail and commercial operations in Asia and Australia as the group shifts its focus on core markets in the UK. Commercial and retail businesses acquired with the acquisition of ABN Amro are likely to be first on the list, although the investment banking and wholesale franchise in key business centres like Hong Kong, Singapore and Japan will remain. Finding any buyers willing to take on toxic assets inherited from ABN Amro will be difficult, although HSBC, Standard Chartered and Australias ANZ could look to make selective buys.
Charter One:
Charter One, the US bank added to the group for $10bn in 2004, has been touted as a potential sale candidate although Hester is not looking to pull back from the US altogether. The Citizens retail business, which is strongest in the eastern US should remain in tact, but selective divestments in the west and mid-west are expected over the next three to five years. Mamoun Taz of MF Global said: In theory you want to sell businesses that will enhance shareholder value but in practice, when there are more pressing issues, you need to consider selling whatever can be sold. The US business includes a credit card operation which may be considered non-core and therefore readied for sale.
Coutts:
Couttss lofty status as private bank and wealth manager to some of the UKs richest individuals does not sit well within the now largely public-owned RBS, leading some to speculate the 300 year-old institution will be put up for sale. Others, however, point out that RBS is unlikely to sell off the family silver at a knock-down price. Even if it was willing to consider a sale, there are few obvious bidders in the current environment.
More likely is a sale of Couttss Swiss-based off-shore banking business in light of the growing crack-down on tax havens. Swiss wealth managers EFG International, Julius Baer and Bank Sarasin could be interested for the right price.
Hoare Govett:
Rumours that RBS could offload UK corporate broker Hoare Govett have been around since the acquisition of ABN Amro in 2007. These have intensified of late as Hoare Govett, once a dominant player in UK corporate broking, continues to lose ground on its rivals. RBS credibility to function as an adviser to other corporates has been called into question, as has its ability to back the fundraising activities of its clients.
Stable banks like Deutsche Bank and Credit Suisse may seek to hire individual talent but are unlikely to consider swallowing up the business as a whole. Barclays Capital, on the other hand, is well-placed to make a push in corporate broking and taking Hoare Govett from RBS could neatly solve the problem of building a broking franchise from scratch.
RBS insurance:
Earlier this month, RBS announced it was shelving plans to sell its cashgenerative insurance business, which includes leading brands Directline, Churchill and Privilege. Despite a multitude of interested parties, RBS failed to find a buyer willing to pay the £7bn it believes the business is worth. Chief executive Stephen Hester said: "Given RBS' broader considerations, it was important to test the market for this business, which has demonstrated that a sale on terms currently available would destroy value for RBS shareholders.
More resilient to the downturn than many of its other operations, analysts welcomed the decision to hang on to the cash-generative insurance operations. Mamoun Tazi of MF Global said: RBSi provides revenue diversification and is cash-flow generative and it would be a mistake to sell it.
That said, it is difficult to see Hester refusing to consider a large chunk of capital should a willing buyer surface.
