The incredible shrinking bank

Published on Thursday 26 February 2009 22:12

ROYAL Bank of Scotland is to undergo a "sweeping restructuring" as it attempts to survive the biggest loss in British corporate history.

Some 20,000 jobs are at risk as RBS searches for 2.5 billion of savings – about a sixth of its current cost base – after declaring a 24.1 billion loss yesterday.

In addition, RBS will withdraw from 36 of the 54 countries in which it operates under plans that will take up to five years.

Precise details of the job losses will not be released until the bank's next interim statement, in July or August.

The bank also announced that, with shareholder backing, it will participate in a UK government insurance scheme to underwrite 325 billion of its "toxic" debts.

This will involve the government taking 13 billion of RBS non-voting shares, a stake that could increase at RBS's request to 19 billion. In return, RBS will pay a 6.5 billion fee – again, in non-voting shares rather than cash – to the Treasury.

This could mean that the government stake in RBS increases from 68 per cent to 95 per cent, although Alistair Darling, the Chancellor, said the bank would not be fully nationalised.

In return for the bail-out, the bank will increase its lending by 25 billion a year over the next two years. This will consist of 9 billion in mortgage loans and 16 billion in business lending.

RBS operations will be split between "core" and "non-core" business, with the latter – equating to about 540 billion of assets – being run down or sold over the next three to five years.

There will also be "substantial" management changes and "changes of personnel", coupled with the promise to reassign and promote talent.

Announcing the changes as RBS published its annual accounts for 2008, Stephen Hester, the chief executive, said: "There is no alternative. RBS must change in a far-reaching way. If we do that, the strength, quality and power that are already present in our business across the world will have the chance to shine through once again."

Mr Hester said that because of the "commercial and human sensitivity" of planned staff cuts , details would remain under wraps until the bank announced its 2009 interim results in the summer. But questioned over the scale of cuts, he said he "wouldn't dissent" from a figure of about 20,000 redundancies worldwide. He said that reports suggesting job cuts on this scale had not used "an irresponsible number".

RBS's loss-making global banking and markets division, which employs 17,500 people worldwide, is set to see the greatest cuts, with "a substantial shrinkage of size, product and geographic scope" leaving it about 45 per cent smaller.

However, the union Unite said it was frustrated at the "lack of clarity" over job losses. Earlier this month, RBS – which employs about 16,500 people in Scotland, announced it was axing 2,300 British jobs – about two per cent of its 106,000 UK workforce.

Derek Simpson, Unite's joint general secretary, said: "The uncertainty hanging over the heads of these workers is unacceptable.

"These historic and humiliating losses bring into sharp focus just how reckless RBS's former management team have behaved.

"The whole country is paying the price through job cuts and repossessions on a massive scale. It is time to take control and fully nationalise this bank. You cannot have a state bail-out on one hand while allowing the spectre of thousands of job losses to loom over staff on the other.

"The government has set a precedent for intervention in the day-to-day running of RBS. They must now intervene to protect the workers in call centres, branches and back offices who are the victims of the credit crunch, not the culprits.

"The staff at this bank should not have to pay with their jobs. We will vigorously oppose any compulsory redundancies."

Mr Hester said participation in the government's insurance scheme – at a level far in excess of expectations – would help to reduce the risk of investments going bad.

The government has already taken a 20 billion stake in the bank, which has 40 million customers worldwide, following an initial recapitalisation last year to prevent its sudden collapse.

The bank's losses dwarf the 14.9 billion declared in 2006 by Vodafone. They involve a net loss of 7.9 billion – more than half linked to the disastrous acquisition in 2007 of Dutch bank ABN Amro – and a 16.2 billion write-down of goodwill, mostly linked with ABN Amro and US bank Charter One, which RBS bought in 2004.

Mr Darling said that "cleaning up" RBS's balance sheet and providing it with sufficient capital would allow it to get through its current difficulties.

He admitted there was a cost to the taxpayer, but added that the "cost of not doing it is absolutely colossal".

Mr Darling said: "You'll remember that when Lehmans, a big investment bank in America, went down, that's what precipitated the crisis in the world's banking system. That's what led to every government in the world having to recapitalise those banks because they were within hours of collapse."

Mr Darling said holding off from full nationalisation would make it easier for the government to return banks to the private sector.

AT A GLANCE

The key points of the RBS restructuring plan include:

&#149 Shedding about 20,000 jobs.

&#149 Splitting the bank into core and non-core functions, with the 540 billion non-core business being sold off within three to five years.

&#149 Participating in the UK government's asset protection scheme, which will see the taxpayer take a stake of up to 19 billion in RBS non-voting shares.

&#149 Anchoring the bank in the UK and withdrawing from 36 countries, including Pakistan, Colombia, Venezuela and Vietnam.

&#149 Making 2.5 billion of efficiency savings by 2011.