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A shadow of former self, RBS investment bank starts comeback

Stock MarketsMar 14, 2018 07:50AM ET
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© Reuters. FILE PHOTO: The City of London business district is seen through windows of the Royal Bank of Scotland headquarters in London

By Emma Rumney and Abhinav Ramnarayan

LONDON (Reuters) - After a decade of deep cuts to rein in a division that nearly bankrupted its parent, Royal Bank of Scotland's (L:RBS) investment bank is attracting new business once again, according to executives and a review of industry data.

The investment banking division, NatWest Markets, helped propel RBS's meteoric rise from a small Scottish lender to a behemoth with assets outstripping British GDP in 2008, almost derailing the economy when it emerged much of them were toxic.

Since then the unit has slashed its product lines from 28 to three: interest-rate products; currencies; and financing, which helps corporate and institutional clients raise debt and acts as a market maker for their bonds.

The investment bank is beefing up financing, the smallest of its three business areas, with one focus being rebuilding relationships with financial customers like banks or insurers that were lost when the bank yanked teams from a host of geographies.

It has risen to eighth place in the league tables of euro-denominated bond sales for financial institutions in 2018 so far, according to Thomson Reuters data, up from 15th place in 2016 and 2017, and 20th in 2015. By comparison, the investment bank was in sixth place in 2008.

Growth at NatWest Markets could be crucial for RBS, which relies on the unit for almost a tenth of its revenue, as it looks to restart dividends and faces a multi-billion-dollar settlement with U.S. authorities for mis-selling mortgage-backed securities before the financial crisis.

Harsh Shah, who is leading the drive as head of financial institutions origination and solutions, told Reuters his team had been reopening dialogue with clients but declined to provide an example of where this had been successful.

NatWest Markets' narrow, European focus diverges from the rest of the industry, which tends to also offer equities and services like M&A and have a more global reach.

This proved an advantage over the past year, as it benefited from comparative volatility in sterling-denominated debt after the Brexit vote while the rest of the industry was struggling with subdued global markets.

But it is too early to predict the fortunes of the investment bank.

Its losses narrowed by almost 900 million pounds ($1.26 billion) in 2017 to 977 million pounds, but it is still wrestling with its past: restructuring and conduct costs accounted for almost 70 percent of that loss.

NatWest Markets is far from being back in the big league because it is now a sliver of the size of its rivals as a result of the cuts. Its 1.05 billion pounds in total revenue in 2017 is dwarfed by the 9.9 billion pounds at Barclays' investment bank (L:BARC) and $15.1 billion in net operating income at HSBC's (L:HSBA) investment bank.


Once emblematic of RBS's penchant for risk taking and ill-judged expansion, culminating in the bank's 45.5 billion pound bailout in 2008, NatWest Markets' streamlined ambitions reflect its parent's drive to concentrate on key markets.

"It is starting to quietly grow market share again in the markets we like," RBS Chief Executive Ross McEwan said at the bank's annual results presentation last month in response to a question from Reuters on plans for NatWest Markets.

He added that there were no "major" plans for expansion.

However NatWest Markets has made a small number of significant hires in financing, including Shah, who was hired in 2016, and two other senior people that were added to its financial institutions team last year. Its government and public organization debt team has also been expanded in recent months.

NatWest Markets acted as joint lead bookrunner or manager on 74 debt transactions by financial institutions last year, up from 49 in 2016, according to information compiled by financial data provider Dealogic and provided to Reuters by RBS.

Even throughout the cuts, NatWest Markets maintained its role as a "primary dealer" for governments, tasked with buying their debt and selling it on to investors. It is a high-profile role that helps banks win other lucrative business in those countries.

For example, after primary dealing for Greece throughout its crisis years, in recent months NatWest Markets has been appointed to manage bond sales by the National Bank of Greece, Eurobank Ergasias and Alpha Bank.

Shah said future growth in its financial institutions business would come from a push into dollar-denominated deals, as well as ongoing strength in euros and sterling.

"We're focused on growing market share further," he said.

($1 = 0.7168 pounds)

(For a graphic on British banks' bond underwriting click

A shadow of former self, RBS investment bank starts comeback

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