The Royal Bank of Scotland (RBS) is one of the oldest banks in the world with over 700 branches, mainly in Scotland, but also in the larger cities in England and Wales. RBS has a proud history stretching back to the early 1700s and was the first bank in the world to offer an overdraft facility in
1728.
In recent times RBS has had problems linked to the worldwide financial crisis. The share price of RBS reached an all time high of £7 per share in 2007. However, in 2008 the UK government had to bailout RBS, buying 84% of its shares at only 50p per share.
RBS is now seen as being owned by the government after it invested £45 billion in the share purchase. In 2011 these shares dropped from the purchase price of 50p per share to 19p per share. This represented a loss of £26 billion to the UK taxpayer.
After the UK government bailout, RBS bonus payments to executives continued, leading to controversy throughout the UK. Staff bonuses were nearly £1 billion in 2010 even though RBS reported losses of £1·1 billion in the same year. More than 100 senior bank executives were paid bonuses in excess of £1 million each. Chief Executive, Stephen
Hester, who was appointed to rescue the heavily indebted bank, was awarded a bonus of
£1 million. Hester subsequently waived the bonus offer after a public outcry at the level of bonuses being awarded by RBS. At the same time Labour MPs had been planning to force a House of Commons vote on the bonuses being offered to RBS executives. The level of the government bailout and the subsequent bonus revelations severely damaged the reputation of RBS.
Rebuilding the Image
Before the financial crisis, three quarters of the senior management team at RBS had been promoted internally. Now almost two thirds of the 330-strong management team have been hired from external sources.
Coupled with high redundancy payments, it proved a costly recruitment exercise for RBS to replace their most experienced staff.
RBS said it needed to cut staff by either closing or selling its Advisory, Cash Equities and
Equity Capital Markets’ operations. Losing many of its experienced staff while waiting on newly hired staff to gain knowledge of the bank was a risky strategy. However, this was seen as an attempt to improve its damaged image and Stuart MacIntyre, who runs the bank’s in-house headhunting function said, “The shift in strategy is part of the company’s aim to rebuild itself following its collapse”. He went on to claim, “It sends out a clear message that the bank is keen to do things differently – complete with a new leadership team, change of board and a new clear strategy”.
The Restructuring Process at RBS
Coming at a time when RBS’ public image was at an all time low, the American investment bank Jeffries looked to clinch a deal to buy the RBS owned stockbroker Hoare Govett.
RBS had placed the stockbroker Hoare Govett up for sale in an attempt to cut their debt and off-load this underperforming business. RBS agreed to provide some funds in the short term, to cover salaries and redundancies at Hoare Govett, in an attempt to ensure the sale went through. Less than half of the 125 staff at Hoare Govett were expected to be retained but Jeffries hoped that the Hoare Govett name would remain.
RBS acquired Hoare Govett during its expansion period when it also bought the debt fuelled Dutch bank ABN AMRO. These were major factors in pushing RBS into the government financial bailout it needed to survive.
The sale was part of a wide ranging restructuring of RBS led by Stephen Hester. When
Hester drew up his original recovery plan for RBS, Hoare Govett was expected to be one of the key profit generators. However, tough new capital rules introduced by global regulators changed the economics of investment banking. Many of the trading businesses, like Hoare Govett, that used to generate large profits for banks struggled to break even. The larger investment banks cut jobs by the thousand and pulled out of dozens of business ventures.
For RBS the restructuring had been made even more difficult by the proposal, put forward by the UK Independent Commission on Banking, to stop banks splitting their operations. In addition the eurozone crisis caused share trading to almost grind to a halt. This killed off a lot of the takeover deals between companies that had previously existed. These deals, and the subsequent stock market flotations, were once the lifeblood of Hoare Govett.
The Future
RBS saw the sale of Hoare Govett as essential as it looked to build up its presence, concentrate on its core activities and once again compete directly with the big investment banks. After having lasted 285 years and briefly becoming the largest bank in the world, it is hoped, for Scotland’s sake, that the rebuilding of The Royal Bank of Scotland will be a
success.