Analysis: RBS must stay competitive - or risk even bigger cuts in future

Published on Thursday 2 September 2010 19:18

BE careful what you wish for . . . A year ago the overwhelming advice offered from politicians to Britain's stricken banks was to clean up their balance sheets, downsize and hive off to encourage competition, cut losses and return to profits so that the emergency support of those taxpayer billions could be repaid in full - and with a useful profit for the risk taken.

For good measure, economists intoned on the need for the UK to rebalance its economy away from financial services.

Royal Bank of Scotland has taken another big step on this painful journey. Another 3,500 more jobs are to go across its UK businesses, bringing the grisly total so far to 26,600 worldwide. It says there should be a net jobs gain in Scotland, but we do not yet know what the final tally will be, and the worry is that the new jobs being created may be less "high value added" - and with lower pay - than the jobs being lost.

This is a deeply unsettling period for Scotland's financial sector. Last week, RBS announced 400 job losses at its Direct Line operations in Glasgow. This week brought news of 600 job losses planned at insurance giant Standard Life. A similar number of jobs are expected to be shed at Aegon, owners of Scottish Equitable.

Why the surge of redundancy announcements now? And how long will this attrition continue? Several factors are at work. The first, for RBS, is an inevitable loss of jobs as a direct consequence of the European Commission-ordered disposal of 318 branches to Santander. Another is the pressing need for the banks to pull out of low-return operations to drive down costs, cut the drain on cash and restore profitability, albeit on a much reduced operational base.

The length and depth of the crisis-induced downturn has also obliged financial-service companies to scale down operations that can be done more efficiently.

Finally, there is the continuing impact of technological change. Growing numbers of customers are switching to phone and in particular internet-based services, reducing the need for staff at physical branches and for sales and marketing operations based on physical literature and face-to-face visits.

Companies continually need to ensure they remain competitive. If they don't, they lose business - and risk bigger job losses longer term.

This attrition is likely to continue, though the worst of the news may now be over. The "pay-off" for the taxpayer could be considerable. Earlier this week, The Banker magazine estimated that the Government could make a profit of as much as 27 billion from bailed-out banks Lloyds and RBS over the next five years.

However, some believe it could be much more. Edinburgh-based finance specialist Robert McDowell says the gain to the Exchequer could be in the region of 100bn-350bn over five years.