RBS Group (UK)

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The Royal Bank of Scotland was one of the world's fastest-growing banks during the early 2000s, before crashing to earth in 2008 as arguably the biggest victim outside the US of the global financial crisis. It first took a quantum leap into the upper ranks of the global industry in 2000 with the hostile takeover of leading clearing bank NatWest. That deal made it the UK's #2 financial services institution behind HSBC, adding a prominent UK retail network to a group which then already included Direct Line insurance and US subsidiary Citizens. The success of the NatWest takeover prompted RBS to embark on a string of ever larger acquisitions which were ultimately to prove disastrous. It extended its profile in the US with several other purchases capped in 2004 by Charter One, and moved into the world's fastest-growing economy through a strategic alliance with Bank of China. The crunch came in 2007 with an attempt to acquire the international assets of Dutch banking giant ABN Amro. That absurdly ambitious takeover was one deal too far. The credit crisis which reached a climax the following year pushed RBS to the brink of bankruptcy, and it was saved only by its nationalisation by the British government in Autumn 2008. In 2009 it announced a program to sell off many of the assets it acquired over the previous five years and refocus on core activities in the UK. Years later, it is still in state ownership, with no prospect of an end to that situation any time soon, and combined losses of £58bn by the end of 2016.

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NatWest Ulster Bank
Coutts & Co Lombard
Citizens Financial Adam & Co

Recent stories from Adbrands Weekly Update:

Adbrands Weekly Update 4th May 2017: There were more strong numbers from UK banks, which seem all to have finally turned the corner after years of struggle with impairments, fines and litigation. Like Lloyds last week, Barclays doubled its underlying profits for the first quarter, though the final reported figures were dented by a £658m loss on the sale of Africa subsidiary Absa. Revenues were also up strongly by 16%. Meanwhile Royal Bank of Scotland reported a much higher than expected profit after years of losses. Analysts had been anticipating a £50m net profit, but instead RBS delivered almost £260m, compared to a loss of £960m in the year ago quarter. Topline was up 14%. HSBC also made up for a string of disappointing numbers last year with a 40% jump in revenues and underlying profits that were also well above expectations.

Adbrands Weekly Update 2nd Mar 2017: The pain never ends at long-suffering UK banking group RBS. Final losses for 2016 came in at almost £1bn more than analysts' expectations of £6bn, bringing combined losses since 2008 to a staggering £58bn. The 2016 figure includes £5.9bn of litigation expenses and bad conduct fines as well as £2.1bn of restructuring, and hundreds of millions more for losses on those last few bad assets still to be jettisoned. The current year is likely to take the accumulated total beyond £60bn, as the group tidies up its remaining loose ends, like the Williams & Glyn banking division it was ordered to sell by EU regulators. Following the collapse of yet another attempt to sell the business last month, RBS has petitioned the EU to waive their requirement for disposal in return for increased investment by the bank in entrepreneurial business banking. Yet buried beneath all the bad investments and bad behaviour of the Noughties is a decent core business struggling to break free. Via its NatWest and Royal Bank of Scotland retail units, RBS remains the biggest bank for UK business customers and #2 in personal banking. CEO Ross McEwan dangled before investors the glimmering vision of a return to profitability in 2018. The core banking businesses both reported modest growth in revenues and operating profits, but were undercut by further losses in what remains of the group's corporate and institutional banking division, now renamed NatWest Markets. Group income continued to drift lower, falling to £12.6bn.

Adbrands Weekly Update 8th Dec 2016: Still struggling British bank RBS agreed yet another mammoth payout to resolve past misbehaviour. In this latest settlement it will pay a combined total of £800m to hundreds of RBS shareholders who took part in a £12bn rights issue in April 2008. Yet only a few months later, RBS was forced into state ownership after coming close to collapse, with existing shareholders virtually wiped out. The claimants accuse the bank of making misleading and untrue statements in the rights prospectus regarding its financial stability. Reportedly, senior managers at the time ignored warnings from internal risk assessors over the quality of its investments in subprime mortgage bonds and other such assets. This settlement covers only the larger investors in the rights issue. Groups representing another 27,000 smaller shareholders have not accepted RBS's offer and are still in negotiations. The bank also faces a mammoth fine of as much as $12bn from US regulators for misselling mortgage-backed securities in the run-up to the crash.

Adbrands Weekly Update 6th Aug 2015: The British government began the gradual sell-off of its majority shareholding in the long-suffering Royal Bank of Scotland Group. It divested an intial 5% stake for £2.1bn in a private placement, reducing its total holding to around 73%. However the sale price of 330p per share was well below the average 502p the Government paid to bail out RBS during the 2008/09 crisis, representing a loss of around £1.1bn for UK taxpayers.

Adbrands Weekly Update 9th July 2015: Two British companies suffered punitive penalties from US regulators. BP finalised an $18.7bn fine to settle federal, state and local government lawsuits arising from the Deepwater Horizon oil spill. It's the biggest such fine in history, but less than was feared, and payment will be spread over as long as 15 years. By contrast, the $13bn fine handed down to RBS for misleading its customers over the sale of mortgage-backed securities in the run-up to the 2008 financial crisis is more than analysts had expected. It's also well above the provisions already set aside by the bank. That will force the government to cut the offer price for the expected sell-off of part of its 79% holding.


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Background

Free for all users | see full profile for current activities: The Royal Bank of Scotland was formed by royal charter in 1727. It was the first serious competitor in that country to the Bank of Scotland, which had been created by Act of Parliament just over 30 years earlier. To attract customers away from its more established rival, the Royal Bank devised a clever and innovative new banking service. This was a line of credit extended to trusted customers, which became known as an "overdraught". Every bank in the world has subsequently followed the Royal Bank's lead.

During the 18th and 19th centuries, the bank expanded its business throughout Scotland, opening offices around the country and acquiring smaller rivals such as Western Bank (in 1857) and Dundee Banking Company (in 1864). Ten years later, RBS made its first foray south of the border, opening a London office. By the outbreak of World War I in 1914, the bank had grown to 158 branches, although all but one were located in Scotland. In the 1920s, England became a major focus for expansion and RBS added a number of prestigious private and merchant banks to its portfolio. These included Drummond's in 1924 and Williams Deacon in 1930. Nine years later, RBS acquired Britain's foremost private bank, Glyn, Mills & Co, along with subsidiaries Child & Co and Holt & Co. Both Williams Deacon and Glyn, Mills continued to operate independently of RBS, and the combined entity became popularly known as the Three Banks Group.

In the years following World War II, the group continued to expand, establishing its first offices in the US. The next wave of consolidation within the banking sector came at the close of the 1960s, when the group added the National Commercial Bank of Scotland to its portfolio. With a spread of over 650 branches, the group began a process of restructuring. The group umbrella changed its name to the National & Commercial Banking Group in 1970, while its three London banks, Glyn, Mills & Co, Williams Deacon's and The National Bank merged to form Williams & Glyn's Bank.

During the 1970s, RBS prospered following the discovery of North Sea oil and gas reserves, and National & Commercial Banking Group changed its name again to The Royal Bank of Scotland Group in 1979. By the 1980s RBS had become an attractive bid target. In 1983, both HSBC and Standard Chartered mounted bids to acquire the group, but were blocked by regulators. Two years later, the group was restructured once again, with Williams & Glyn being merged into Royal Bank of Scotland. Also that year, the bank backed the launch of new insurance sales service Direct Line, which went on to become one of the great financial services success stories of the 1990s.

Following the lead of other British banks, RBS made a leap into the international banking market in 1989, acquiring Citizens Financial Group in the US, and forging an important partnership with leading Spanish institution Banco Santander. The two banks swapped shares, with Banco Santander acquiring a 10% holding in RBS. (Those ties were severed in 2005 following Santander's purchase of UK bank Abbey). Bad debt charges in the early 1990s hit the bank hard, and in 1992 it was forced to write off £1bn of bad loans. Newly appointed chief executive George Mathewson cut costs ruthlessly and disposed of the bank's merchant banking business to concentrate on retail banking. He also acquired another Scottish private bank, Adam & Co. Performance improved steadily, and in 1997 RBS revolutionised the supermarket sector by partnering with Tesco to offer Tesco Personal Finance products to supermarket customers. The enormous success of the offer caused the bank's retail customer base to double to 800,000 in one year. A similar joint venture with the Virgin Direct insurance arm of Richard Branson's Virgin Group led to the launch of Virgin One banking services. In 2001, RBS took full control of Virgin One, and began extending the product under its other group brands. American subsidiary Citizens embarked on an acquisition spree in the 1990s, buying a string of smaller competitors including the majority shareholding in First New Hampshire (from Bank of Ireland) for $710m, and Connecticut-based Farmers & Mechanics bank.

Towards the end of the decade RBS began to explore more dramatic acquisition targets in the UK. In 1997, RBS agreed to acquire regional building society Birmingham Midshires, but was trumped by a higher offer from Halifax, who went on to make a tentative offer to RBS as well. The Scottish bank turned it down, preferring the senior role in any such partnership. In 1999, RBS made two offers to Barclays, then suffering from senior management problems, but both were rebuffed. But later that year, another of the main clearing banks, NatWest, suddenly found itself on the receiving end of a hostile bid from Bank of Scotland. Struggling to find a defence strategy, NatWest initially approached RBS as a white knight. When the English bank turned down RBS's initial friendly offer, the Scottish bank went hostile, mounting an offer ultimately worth £20bn. NatWest's shareholders voted in favour of RBS's bid in 2000, propelling the enlarged Royal Bank into the country's #2 slot behind HSBC.

In 2001, the group signalled that was looking to expand its position in the US, acquiring a second bank, Mellon Financial for $2.8bn. The purchase extended RBOS's US business outside New England for the first time, more than doubling the number of retail branches in the country. Reporting strong financials for the year, the group announced that it was keen to extend its North American business further still. Later that year it snapped up two further banks in New England and Pennsylvania. In 2003 the group strengthened its insurance, Irish and private banking operations with a series of strategic purchases, and also purchased the credit card and personal loan portfolios of Santander Direkt Bank, the third-largest credit card provider in Germany with almost 500,000 customer accounts.

In 2005, RBS headed a consortium of foreign investors who between them acquired a 10% shareholding in Bank of China for around $3.1bn. Two years later, Royal Bank of Scotland teamed up with Santander and Fortis of Belgium to contest an agreed E67bn purchase of Dutch banking giant ABN Amro by UK's Barclays. After a bidding war, the consortium's offer of E70bn was preferred over that of Barclays. ABN Amro was broken up, with RBS taking charge of the bulk of the group's international business, as well as its investment banking arm, led by UK-based broker Hoare Govett. It was not able to prevent a side-deal agreed by ABN Amro for the sale of its US subsidiary LaSalle to Bank of America. Santander absorbed ABN's operations in Italy and Brazil, and its Dutch retail operations were taken over by Fortis.

However the ABN Amro acquisition proved to be a time bomb waiting to explode. As the global financial crisis escalated, RBS and Fortis were forced to write off huge sums relating to their own bad investments as well as those made by ABN Amro, and the cash purchase stretched their financial resources to breaking point while also causing investor confidence to plunge. The UK government was forced to step in to prevent RBS from insolvency. The group began dismantling some of its international commitments in 2009. The shareholding in Bank of China was sold for £1.6bn. Most of the group's assets in smaller Asian markets such as Taiwan, Singapore, Indonesia, the Philippines and Vietnam, were sold mid-year to Australia's ANZ Bank for $550m. Another subsidiary, the UK's largest train leasing company Angel Trains, was sold to Australian infrastructure group Babcock & Brown in June 2008 for £3.6bn in debt and equity. See full profile for current activities


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