RBS rising from ruins as shadow of former self

Nine years after the beginning of a 45-billion-pound ($56 billion) bailout by the British government, Royal Bank of Scotland is emerging from its restructuring process a shadow of what was once the biggest lender in the world. RBS had a balance sheet of 2.4 trillion pounds in 2008 almost double Britain’s annual economic output at the time - having staged a meteoric rise from being a small Scottish lender in the early 1990s.

Since the bailout it has offloaded billions of pounds of assets a week, as it tries to shrink down to being a simple UK-focused lender. Later this year RBS will shut its Capital Resolution division, which has sold off large chunks of its huge stockpile of unwanted assets. The closure will mark a milestone in the bank’s road to recovery, with its balance sheet around 1.6 trillion pounds lighter than when its great sell-off began.

“For the first time in a long time there is a distinction between yesterday and tomorrow,” Mark Bailie, who runs the unit told Reuters in an interview at the lender’s lender’s ultra-modern glass-and-steel offices in London’s financial district. RBS has undergone a huge asset sale, ranging from a fleet of aircraft in Beijing and the largest hospital in Sydney, to a golf course 110 km from the nearest road in Florida, and a graveyard in the US Deep South.

The steep and ongoing asset-shedding, plus the deep staff and IT systems overhaul still to come, mean the future shape of RBS and its growth potential are still unknown propositions for investors, according to shareholders and analysts.

“I think it is not investable at the current time. There is just too much more work to be done,” said Julian Chillingworth, chief investment officer at Rathbone Brothers, which holds some RBS shares.

Britain’s government has ruled out reducing its stake in the bank until it resolves a multi-billion pound US fine for mis-selling toxic mortgage-backed securities and resolves its state aid requirements.

The bank’s relatively small size now and the cost of its nine-year overhaul is raising questions from politicians and industry experts over whether taxpayers - who already face a paper loss of 29 billion pounds on their investment - will see the kind of stellar RBS growth needed to retrieve all their cash.

Few in the banking sector or government believe rescuing and reducing RBS was the wrong decision, given the risks it posed to the wider financial system. A collapse could have triggered a run on every bank in Britain.

Still, RBS’s story illustrates the perils of bailouts at a time when state intervention is back in focus in Europe; while EU regulations have been tightened to make state bailouts a last resort, the Rome government is nonetheless seeking permission from European authorities to bail out debtladen Monte dei Paschi di Siena and two smaller Italian banks.

An RBS spokesman directed queries on whether taxpayers would retrieve their money to comments by Chief Executive Ross McEwan last year when he said it was possible the state would not get its full investment back. A spokesman for the Treasury said any future sale of its stake is dependent on market conditions, and that the government will seek value for money for taxpayers.

90 billion bill

It was three weeks after the collapse of Lehman Brothers crippled global credit markets in 2008 that Britain’s then finance minister Alistair Darling had to make a snap decision to buy RBS. The giant bank was hurtling towards bankruptcy so fast no one in government had a chance to find out exactly what it owned or how to value it. Reuters calculations based on RBS’s financial statements going back to the crisis show how extreme the turnaround has been since then.

RBS’s management has been selling or running off on average 3 billion pounds worth of assets every week, according to the analysis which tracked the size of the bank’s balance sheet from 2008 onwards. That’s the equivalent of selling London’s Shard - Western Europe’s tallest skyscraper every five days. In total about 1.6 trillion pounds of assets have been stripped out of RBS’s balance sheet - equivalent to the economic output of Brazil.

Bailie, 44, a qualified accountant, was tasked with shedding much of these unwanted assets.

“You had an unsustainable balance sheet, an unsustainable culture and an unsustainable cost base and, therefore, I do think it will be the biggest turnaround ever done,” he said. Much is yet to be done, according to the other senior RBS source who said the bank had three to four years of cutbacks ahead.

Tasks range from reducing the number of payment systems from 140 to 10, and mortgage processing systems from five to one, to cutting thousands of back-office staff, said the source, who declined to be named as he is not authorized to speak publicly.

Reuters calculations also put a final cost on RBS’s lending losses in terms of writeoffs, plus the writedowns on assets, as well as restructuring costs, legal bills and fines. It tops 90 billion pounds. —Reuters