Royal Bank of Scotland Group

The Royal Bank of Scotland Group plc

Type	Public (LSE: RBS)
Industry	Financial services
Founded	1727
Headquarters	Edinburgh, Scotland, United Kingdom
Area served	Worldwide
Key people	Philip Hampton, (Chairman) Stephen Hester, (CEO)
Products	Finance and insurance Consumer Banking Corporate Banking Investment Banking Global Wealth Management Mortgages Credit Cards
Revenue	£33.836 billion (2009)[1]
Operating income	£2.595 billion (2009)[1]
Net income	£2.323 billion (2009)[1]
Total assets	£1.696 trillion (2009)[1]
Total equity	£77.736 billion (2009)[1]
Owner(s)	United Kingdom Government (84%)
Employees	170,000 (2008) [2]
Subsidiaries	Royal Bank of Scotland National Westminster Bank Ulster Bank Direct Line Citizens Financial Group Coutts & Co. Adam and Company Child & Co. RBS Securities
Website	www.rbs.com

The Royal Bank of Scotland Group (LSE: RBS) is a British state owned banking and insurance holding company in which HM Treasury holds an 84% controlling share (economic interest; actual voting rights will not rise above 75% in order to retain stock listing).^[3] This stake is held and managed through UK Financial Investments Limited. The group is based in Edinburgh, Scotland, and is the world's largest company by assets.^[4]

The group controls the Royal Bank of Scotland plc,^[5] founded in 1727 by a Royal Charter of King George I, the National Westminster Bank, which can trace its lineage back to 1650, and Ulster Bank in Ireland.^[6]

RBS Group is the largest banking group in Scotland, and at its earlier peak was the second largest in the UK and Europe (fifth in stock market value), and the fifth largest in the world by market capitalisation. According to Forbes Global 2000, it was the tenth largest company in the world.^[7] Its shares have a primary listing on the London Stock Exchange. The registered head office of the group and the UK clearing bank are located at St Andrew Square, Edinburgh. In 2005, Queen Elizabeth II opened the bank's new head office building in Gogarburn, Edinburgh.

The RBS Group operates a wide variety of banking brands offering personal and business banking, private banking, insurance and corporate finance throughout its operations located in Europe, North America and Asia. In the UK and Republic of Ireland, the main subsidiary companies are: The Royal Bank of Scotland; National Westminster Bank; Ulster Bank; Drummonds; and Coutts & Co. In the United States, it owns Citizens Financial Group, the 8th largest bank in the country. From 2004 to 2009 it was the second largest shareholder in the Bank of China, itself the world's fifth largest bank by market capitalisation in February 2008.^[8] Insurance companies include Churchill Insurance, Direct Line, Privilege, and NIG.

The group issues banknotes in Scotland and Northern Ireland and, as of 2008, Royal Bank of Scotland is the only bank in the UK still to print a £1 note.

History

By 1969 economic conditions were becoming more difficult for the banking sector. In response, the National Commercial Bank of Scotland merged with the Royal Bank of Scotland.^[9] The resulting company had 662 branches. The merger resulted in a new holding company, National and Commercial Banking Group Ltd. The English and Welsh branches were reorganised, until 1985, as Williams & Glyn's Bank, while the Scottish branches all transferred to the Royal Bank name. The holding company was renamed Royal Bank of Scotland Group in 1979.^[10]

Takeover bids

Royal Bank of Scotland Group footprints

During the late 1970s and early 1980s the Royal Bank was the subject of three separate takeover approaches. In 1979, Lloyds Bank, which had previously built up a 16.4% stake in the Royal Bank, made a takeover approach for the remaining shares it did not own. The offer was rejected by the board of management on the basis it was detrimental to the bank's operations. However when the Standard Chartered Bank proposed a merger with the Royal Bank in 1980, the board of management responded favourably to the offer. Standard Chartered Bank was headquartered in London, although most of its operations were in the Far East, and the Royal Bank saw advantages in creating a truly international banking group. Approval was received from the Bank of England, and the two banks agreed a merger plan that would see the Standard Chartered acquire the Royal Bank and keep the UK operations based in Edinburgh. However the bid was scuppered by the Hongkong and Shanghai Banking Corporation (HSBC) which tabled a rival offer. The bid by HSBC was not backed by the Bank of England, and was subsequently rejected by the Royal Bank’s board of management. However the British government referred both bids to the Monopolies and Mergers Commission; both were subsequently rejected as being against the public interest.^[11]

The Bank did obtain an international partnership with Banco Santander Central Hispano of Spain, each bank taking a 5% stake in the other. However this arrangement ended in 2005, when Banco Santander Central Hispano acquired UK bank Abbey National – and both banks sold their respective shareholdings.

International expansion

The first international office of the bank was opened in New York in 1960. Subsequent international banks were opened in Chicago, Los Angeles, Houston and Hong Kong. In 1988 the bank acquired Citizens Financial Group, a bank based in Rhode Island, United States. Since then, Citizens has acquired several other American banks, and in 2004 acquired Charter One Bank to become the 8th largest bank in the United States.

The Royal Bank also opened offices in Europe and now has subsidiaries in: Austria, Switzerland, France, Italy, Germany, Greece, Spain, Portugal, Denmark, Norway, Sweden and the Federation of Bosnia and Herzegovina. In the Asia-Pacific region, the bank has offices in: Australia, China, Hong Kong, India, Japan and Singapore.

National Westminster Bank

The late 1990s saw a new wave of consolidation in the financial services sector. In 1999, the Bank of Scotland launched a hostile takeover bid for English rival NatWest. The Bank of Scotland intended to fund the deal by selling off many of the NatWest’s subsidiary companies, including Ulster Bank and Coutts. However, the Royal Bank subsequently tabled a counter-offer, sparking off the largest hostile takeover battle in UK corporate history. A key differentiation from the Bank of Scotland’s bid was the Royal Bank’s plan to retain all of NatWest’s subsidiaries. Although NatWest, one of the "Big 4" English clearing banks, was significantly larger than either Scottish bank, it had a recent history of poor financial performance and plans to merge with insurance company Legal & General were not well received, prompting a 26% fall in share price.^[12]

On 11 February 2000, the Royal Bank of Scotland was declared the winner in the takeover battle, becoming the second largest banking group in the UK after HSBC Holdings. NatWest and the Royal Bank of Scotland became subsidiaries of the holding company; the Royal Bank of Scotland Group. NatWest as a distinct banking brand was retained, although many back office functions of the bank were merged with the Royal Bank's leading to over 18,000 job losses throughout the UK.^[13]

Further expansion

In 1967, RBS became the first Scottish bank to install an Automated Teller Machine, and by 1980 the service, known as Cashline had become the busiest ATM network in the world. Today it is now the largest privately owned ATM network in the UK, it is also a member of the LINK ATM network. In 1997, RBS was the first bank in the world to make its ATMs available to all cardholders. The word Cashline, in Scotland at least, has become a generic term for an ATM.

In August 2005, the bank expanded into China, acquiring a 10% stake in the Bank of China for £1.7 billion ^[14].

A new international headquarters was built at Gogarburn on the outskirts of Edinburgh, and was opened by Queen Elizabeth II and Prince Philip, Duke of Edinburgh in 2005. The St Andrew Square office still remains the official registered head office.

The bank was the 2005 recipient of the Wharton Infosys Business Transformation Award, an award given to enterprises and individuals who use information technology in a society-transforming way.

The Group was part of a consortium with Belgian bank Fortis and Spanish bank Banco Santander that acquired Dutch Bank ABN AMRO a on 10 October 2007. Rivals speculated that RBS had overpaid for the Dutch bank^[15] although the bank pointed out that of the £49bn paid for ABN AMRO, RBS's share was only £10bn (equivalent to £167 per citizen of the UK) ^[16].

Coutts Bank's international businesses were renamed RBS Coutts on 1 January 2008.

2008-2009 financial crisis

After previous denials following press coverage,^[16] on the 22 April 2008 RBS announced a rights issue which aimed to raise £12bn in new capital to offset a writedown of £5.9bn resulting from credit market positions and to shore up its reserves following the purchase of ABN AMRO. This was, at the time, the largest rights issue in British corporate history.^[17] The bank also announced that it would review the possibility of divesting some of its subsidiaries to raise further funds, notably its insurance divisions Direct Line and Churchill.^[18] Churchill and Direct line currently remain as part of RBS Group.

On 13 October 2008, in a move aimed at recapitalising the bank, it was announced that the British Government would take a stake of up to 58% in the Group. The aim was to "make available new tier 1 capital to UK banks and building societies to strengthen their resources permitting them to restructure their finances, while maintaining their support for the real economy, through the recapitalisation scheme which has been made available to eligible institutions".^[19] A rights issue to existing shareholders having failed to secure more than minimal take-up, the government subsequently found itself owning more than 57% of the bank's equity share capital.

The Treasury would infuse £37bn ($64bn, €47bn, equivalent to £617 per citizen of the UK) of new capital into Royal Bank of Scotland Group plc, Lloyds TSB and HBOS plc, to avert financial sector collapse. The government stressed, however, that it was not "standard public ownership" and that the banks would return to private investors "at the right time."^[20][21].

Chancellor of the Exchequer Alistair Darling stated UK taxpayers would benefit from the government's rescue plan, as it will have some control over RBS in exchange for £5bn in preference shares and underwriting the issuance of a further £15bn in ordinary shares. If shareholder take-up of the share issue was 0% then total government ownership in RBS would be 58% and if shareholder take-up was 100% then total government ownership in RBS would be 0%.^[22]. In the event, less than 56 million new shares were taken up by investors, or 0.24pc of the total offered by RBS in October 2008.^[23]

As a consequence of the mismanagement which necessitated this rescue the Chief Executive of the group Sir Fred Goodwin offered his resignation which was duly accepted. Chairman Sir Tom McKillop confirmed he would stand down from that role when his contract expires in March 2009. Goodwin was replaced by Stephen Hester, previously Chief Executive of British Land, who took over at the Royal Bank of Scotland in November, 2008.^[24]

On the 19 January 2009 the British Government announced a further injection of funds into the UK banking system in an attempt to restart personal and business lending. This would involve the creation of a state-backed insurance scheme which would allow banks to insure against existing loans going into default, in an attempt to restore the banks' confidence.^[25]

At the same time the government announced its intention to convert the preference shares in RBS that it had acquired in October 2008 to ordinary shares. This would remove the 12% coupon payment (£600m p.a) on the shares but would increase the state's holding in the bank from 58% to 70%.^[26]

On the same day RBS released a trading statement in which it expected to post full-year trading losses (before writedowns) of between £7bn and £8bn. The group also announced writedowns on goodwills (primarily related to the takeover of Dutch bank ABN-AMRO) of around £20bn. The combined total of £28bn would be the biggest ever annual loss in UK corporate history (the actual figure was £24.1bn). As a result the group's share price fell over 66% in one day to 10.9p per share, from a 52-week high of 354p per share, itself a drop of 97%.^[26] Some commentators called this the Blue Monday Crash.

Recent developments

In June 2008 RBS sold the subsidiary Angel Trains for £3.6bn^[27] as part of a £10bn assets sale to raise cash.

RBS' contractual commitment to retain the 4.26% Bank of China (BoC) stake ended on 31 December 2008, and the shares were sold on 14 January 2009. Exchange rate fluctuations meant that RBS made no profit on the deal. The Scottish press suggested two reasons for the move: the need for a bank mainly owned by HM Treasury to focus scarce capital on British markets, and the growth possibility of RBS' own China operations.^[28][29] However, Chinese sources noted that BoC had been unhappy with RBS' continued expansion of mainland operations rivalling BoC in the highly profitable wealth management sector.

In March 2009, RBS announced the closure of its tax avoidance department, which had helped it avoid £500m of tax by channelling billions of pounds through securitized assets in tax havens such as the Cayman Islands. The closure was partly due to a lack of funds to continue the measures, and partly due to the 70% taxpayer stake in the bank.^[30]

Also in March 2009, RBS revealed that its traders had been involved in the purchase and sale of sub-prime securities under the supervision of Sir Fred Goodwin.^[31]

In September 2009, RBS and Natwest announced dramatic cuts in their overdraft fees. The unpaid item fee was reduced from £38 to £5 and the card misuse fee was reduced from £35 to £15. Meanwhile, the monthly maintenance charge for going overdrawn without consent is down from £28 to £20.^[32] The cuts come at a time when the row over the legality of unauthorised borrowing reaches the House of Lords. The fees are estimated to earn current account providers about £2.6bn a year.^[33] The Consumers' Association chief executive, Peter Vicary-Smith, said: "This is a step in the right direction and a victory for consumer pressure."^[32]

The Group were reportedly planning to sell off their English and Welsh RBS branded branches and the Scottish branches of Natwest under the defunct Williams and Glyn's brand, last used in 1985, following conditions set by the European Union and the British Government regarding state support. In March 2010 the BBC reported that the Group had issued a sales memorandum for the business, which would include 318 branches and around £20bn of loans provided to small businesses and households, with bids expected in April.^[34] The insurance division is also set to be put up for sale, or as a separate company through an initial public offering.^[35] It had been reported in late October 2008 that the insurance company Swiss Re and venture-capital firm CVC Capital Partners were to purchase the Group's insurance division for £6 billion,^[36] however the bank refused to provide funding to the buyer which had been required within the deal.

In November 2009, RBS announced plans to cut 3,700 jobs in addition to 16,000 already planned, while the government increased its stake in the company from 70% to 84%.^[37]

In December 2009, the RBS board revolted against the main shareholder, the British government. They threatened to resign unless they were permitted to pay bonuses of £1.5bn to staff in its investment arm.^[38] The warning was very heavily criticised because it came in the wake of a £850bn bailout of the banking sector.

In March 29, 2010, GE Capital acquired Royal Bank of Scotland’s factoring business in Germany. GE Capital signed an agreement with the Royal Bank of Scotland plc (RBS) to acquire 100% of RBS Factoring GmbH, RBS’s factoring and invoice financing business in Germany, for an undisclosed amount. The transaction is subject to a number of conditions, including regulatory approval.^[39]

Branding

The RBS Group uses branding developed for the Bank on its merger with the National Commercial Bank of Scotland in 1969.^[40] The Group's logo takes the form of an abstract symbol of four inward-pointing arrows known as the "Daisy Wheel" and is based on an arrangement of 36 piles of coins in a 6 by 6 square,^[40] representing "the accumulation and concentration of wealth by the Group"^[40].

Operations

The Royal Bank of Scotland's office in Fleet Street, London- also home to Child & Co.

The RBS Group is split into 8 operating areas. Each operating area has several subsidiary businesses.

Retail Banking

This is the group’s main UK business, offering personal and business banking services. Services are operated under both the Royal Bank of Scotland and NatWest brand names. Key subsidiaries include:

• National Westminster Bank
• National Westminster Life Assurance
• Royal Bank of Scotland
• Royal Scottish Assurance

Wealth Management

This is the group’s private bank division providing services to wealthy individuals:

• Adam and Company
• Child & Co
• Coutts & Co.
• Drummonds Bank
• RBS Coutts
• NatWest Offshore
• NatWest Stockbrokers
• Royal Bank of Scotland International
• Isle of Man Bank

Retail - Direct Channels

This division is responsible for the group’s credit card businesses in the UK and Europe; including internet and telephone based banking brands; and processing facilities for retailers. Key subsidiaries and brands include:

• Comfort Card
• Style Cards
• Direct Line
• Lombard Direct
• Mint
• The One account
• Streamline Merchant Services
• WorldPay

Corporate Markets

This division consists of UK Corporate Banking which provides financing, leasing services and transaction processing to corporate customers. The Global Banking and Markets division provides debt and risk management to corporate and institutional customers in markets around the world. Key subsidiaries include:

• Jamjarcars
• Lombard
• RBS Greenwich Capital
• RBS Nordisk Renting

RBS Insurance

RBS Insurance is the second largest general insurance provider in the UK, as well as a growing presence in Spain, Italy, and Germany. Key brands include:

• Churchill Insurance

Churchill Insurance also underwrites: Lloyds TSB, Prudential, Pearl, and Alliance & Leicester car insurance brands.

• Direct Line

Direct Line also underwrites: Privilege (Privilege Direct, consumer side of the business).

• Devitt Insurance
• Green Flag
• NIG
• Finsure
• Inter Group, with its brands Options and Medicover. The brand identifier Olly Options was created by Dirk Kelly.
• Intermediary and Broker
• Privilege
• UKI Partnerships

UK Insurance Ltd. also underwrites: Tesco, Privilege Fleet, Egg, Mint, Mini, BMW, Peugeot, Suzuki, Vauxhall, MBNA, NatWest, RBS Royalties, Virgin Money, Ulster Bank, The One Account etc. insurance brands.

• Tracker

Ulster Bank Group

Ulster Bank Group provides personal and business banking services in Northern Ireland and the Republic of Ireland.

Citizens

The fifth largest banking group in the United States, headed by Ellen Alemany this division includes the Bank's businesses in North America, including Citizens Financial Group and Charter One Bank.

Business Services

This 'invisible' 8th division provides centralised back-office services for much of RBS Group, ranging from Cash/Coin Management, Call Centres, to Desktop Support and general IT for the more visible banking and insurance brands like Royal Bank, Direct Line, NatWest, etc.

Controversy

Subprime mortgage crisis

The group has been adversely affected by the subprime mortgage crisis and the fair value adjustments of its assets. It has been supported by the UK Government, who now own a majority of its shares on the London stock exchange.

Media commentary and criticism

During Goodwin's tenure as CEO he attracted some criticism for lavish spending, including on the construction of a £350m headquarters in Edinburgh opened by the Queen in 2005^[41] and $500m headquarters in the US begun in 2006,^[42] and the use of a Dassault Falcon 900 jet owned by leasing subsidiary Lombard for occasional corporate travel.^[43] Revelations that RBS had spent £200m on celebrity endorsements also went down badly.^[44]

In February 2009 RBS reported that while Sir Fred was at the helm it had posted a loss of £24.1bn, the biggest loss in UK corporate history.^[45] His responsibility for the expansion of RBS, which led to the losses, has drawn widespread criticism. His image was not enhanced by the news that emerged in questioning by the Treasury Select Committee of the House of Commons on 10 February 2009, that Goodwin has no technical bank training, and has no formal banking qualifications.^[46]

In January 2009 The Guardian's City editor Julia Finch identified him as one of twenty-five people who were at the heart of the financial meltdown.^[47] Nick Cohen described Goodwin in The Guardian as "the characteristic villain of our day", who made £20m from RBS and left the taxpayer "with an unlimited liability for the cost of cleaning up the mess".^[48] An online column by Daniel Gross labelled Goodwin "The World's Worst Banker",^[42][49] a phrase echoed elsewhere in the media.^[50][51] Gordon Prentice MP argued that his knighthood should be revoked as it is "wholly inappropriate and anomalous for someone to retain such a reward in these circumstances."^[52]

Other members have also frequently been criticised as "fat cats" over their salary, expenses, bonuses and pensions^{[53][54][55][56][57][58][59][60]}.

Kraft takeover of Cadbury

In November 2009, RBS switched from backing long-standing UK client Cadbury plc to back a hostile takeover from a US company Kraft Foods^[61] whilst being 84% owned by the UK Government.^[62]

Links to the arms trade

In December 2008 the British anti-poverty charity War on Want released a report documenting the extent to which RBS and other UK commercial banks invest in, provide banking services for and make loans to arms companies. The charity writes in its report that RBS holds shares in the UK arms sector totally £36.4 million, and serves as principal banker to four major arms companies, including BAE Systems, the UK's largest arms company. The report also details RBS's dealings with known producers of cluster munitions and depleted uranium.^[63]

Fossil fuel financing

RBS is accused of sponsoring oil and coal mining by pressure groups like Friends of the Earth. Like many banks, RBS provides the financial means for companies to build coal-fired power stations and dig new coal mines at sites all over the world. RBS is helping to provide an estimated £8bn over the last two years to energy corporation E.ON, and other companies utilising coal.^[64]

Bank of China and Burma

The bank's former 10%^[65] stake in Bank of China led to accusations of investing in the Government of Burma.^[66] The Group defended its position by saying, "Bank of China is a highly respected international financial institution. ... [It] sets out its policies in its published accounts and we are happy with these policies and the way in which they are applied." ^[66]

Huntingdon Life Sciences

In 2000 and 2001, the bank was the target of threats of violence over its provision of banking facilities for the animal testing company Huntingdon Life Sciences. The action resulted in RBS withdrawing the company's overdraft facility, causing the company to obtain alternative funding on a tight deadline.^[67][68]

Sakhalin II

On 17 January 2008 environmental groups wrote to Goodwin to urge him to exercise his leadership to resolve environmental problems associated with the ABN AMRO-financed Sakhalin II project (RBS, Fortis and Banco Santander acquired ABN AMRO in 2007).^[69]

Corporate jet

In June 2004, RBS admitted that it owned a Dassault Falcon 900 jet worth £17.5m for the use of Goodwin and the board. Based in Paris for maintenance and tax purposes, the jet is also leased to the bank's clients via Lombard.^[70] In light of the 2008/9 recapitalisation program, new CEO Stephen Hester placed the jet up for sale in January 2009.^[71]

Canadian oil sands

Climate Camp activists criticise RBS for funding firms which extract oil from Canadian oil sands.^[72] The Cree aboriginal group describe RBS as being complicit in "the biggest environmental crime on the planet".^[73]

Banknotes

The group's pound sterling banknote issues are in wide circulation in Scotland and Northern Ireland. In Scotland, Royal Bank of Scotland banknotes include the UK's last £1 note. Ulster Bank is one of four issuers of Northern Ireland banknotes, though, like other private sector banks, it does not issue notes in the Republic of Ireland, where the official currency is the euro.

See also

• Fred Goodwin
• List of banks in the United Kingdom
• European Financial Services Roundtable
• High-yield debt
• Inter-Alpha Group of Banks
• UK Financial Investments Limited

References

External links

• The Royal Bank of Scotland Group official site

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Royal Bank of Scotland Group Banking: ABN AMRO · Adam & Company · Child & Co. · Citizens Bank · Coutts & Co. · Drummonds Bank · First Active · Isle of Man Bank · Mint · National Westminster Bank · Royal Bank of Scotland · Royal Bank of Scotland International · The One account · Ulster Bank · X-ite Insurance and Motoring: Churchill UK · Devitt Insurance · Direct Line · Finsure · Green Flag · Jamjarcars · Lombard Direct · NIG  · Privilege · Tracker · UKI Partnerships Corporate and Payment Services: RBS Aviation Capital · RBS Securities · RBS WorldPay Annual Group Revenue: £25.8 billion GBP ( £24.1 billion FY 2008) · Employees: 199,500 · Stock Symbol: LSE: RBS · Website: www.rbs.com