It was good news that at last RBS is making a profit. It was, unfortunately, a very small profit in relation to the massive amounts of capital employed, but it is a lot better than the run of losses we long suffering taxpayer shareholders have got used to. A bank with a balance sheet of £1.2 trillion needs to make £12bn a year just to provide a 1% return on total capital, or around 10% on shareholders capital assuming the conventional 10% ratio of shareholders funds to total assets. A return of £1.4bn in half a year is low.
There is also a new Chief Executive in the wings, already working for the bank. What is needed now is a new strategy, a sense of direction and purpose, the promise of a better bank or banks to come. The Chancellor has set up a quick review of the future of RBS. Let me set out again the case for creating more banks from within the Group.
RBS was never a successful conglomerate. The economies and scale and efficiency gains from assembling a wide range of different banks never materialised. Instead the shaky financial structure and the overstretch the large rambling group imposed on the management brought the proto giant down. It had no time to prove major benefits from a series of mega mergers culminating in the ABN Amro one just before the crash. Some of us who opposed the mergers at the time could not see how a single management could weld these disparate banks and businesses into a more successful whole. Cross selling within a Group full of differing styles and practices is never easy, and prone to conflict of interest obstacles as well.
The new team should have as its aims returning money to taxpayers and creating a better group of banks that can contribute to UK economic recovery.
Selling Citizens, the US bank, is a relatively simple first task. It would release cash and management time, and allow a successful free standing US bank to make more progress under new ownership. A special capital pay out could be made to RBS shareholders.
Segregating Ulster Bank, the cause of many problems, would assist the recovery of the rest. Ulster Bank before it can be returned as a free standing competitor would need to be recapitalised, from some of the proceeds of other sales within the Group. It may also need some Treasury continuing guarantees or support as it works through its remaining difficult loans.
The Investment bank has in the past been a major contributor to RBS profits, or a source of profit to offset losses elsewhere. It is proving difficult to run a fully competitive successful Investment bank within the confines of public sector ownership of the Group. Investment banker remuneration and activity is difficult to justify if taxpayers stand behind it. There are two answers . One is to float it off separately. The other is to twin it with one of the clearing banks in the RBS group suitable for early sale. Perhaps adding it to Nat West, recreating the old County/Nat West relationship could be achieved. Delay in sorting out a future for the Investment bank is likely to damage it, as talent leaves to go elsewhere.
Next we need to ask how to sell the UK commercial banks within the Group. Management will probably favour keeping them together. Some progress has been made in rationalising the network and back offices. However, from the competition point of view it would be better to recreate Nat West, RBS and Coutts, for example, as independent brands with their own range of assets, liabilities, clients and services. This may take longer than a simple share sale, but would help promote more banking competition in the UK and woudl allow the establishment of more well financed competitor banks which can be sold off as soon as the work is done establishing them.
The management may well be against. After all, they have spent time trying to find synergies and benefits from more integrated working. However, with the right leadership and incentives it might be possible to carry out this work relatively speedily and end up with a much stronger and better banking sector. If it is not, the best option is to drive harder for a more profitable remaining RBS and sell shares in it as soon as possible. Taxpayers owning banks, especially Investment banks, is not a good idea. One way or another we need to cut taxpayer risk and get some money back.