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RBS Bankers Preparing for Nuclear Winter as Hester Undoes Goodwin Empire

10 Jan 2012

By Thursday lunchtime in London, the 18,900 employees in Royal Bank of Scotland Group Plc’sinvestment banking division will know whether they still have jobs at Britain’s biggest government-owned lender.

Chief Executive Officer Stephen Hester, 51, decided to make the announcement, originally planned for later this month, because uncertainty in the ranks about jobs was undermining productivity, said one senior executive who declined to be identified because he wasn’t authorized to speak publicly.

Hester is reversing a decade of expansion led by former CEOFred Goodwin that included $140 billion of acquisitions. The Edinburgh-based lender plans to close its equities and corporate finance units globally, cutting as many as 5,000 jobs, said two people familiar with the situation. The cash equities, equity research, corporate broking as well as mergers and acquisitions units may also be shut, the people said. Limiting cuts to the equities unit may not be enough to boost profitability, said Raul Sinha, an analyst at JPMorgan Cazenove in London.

“Addressing only the equities business profitability is insufficient to change the global banking and markets unit’s return on equity prospects, given that the issues are capital consumption as well as costs,” said Sinha in a note to investors.

Banking Review

Hester is extending cuts he made when he reviewed the bank’s operations in 2009 after he took over from Goodwin, 53. Since that time he has cut the bank’s assets by about 1 trillion pounds ($1.54 trillion). He retreated from some markets in Asia, running off loans and selling units including the European division of commodities-trading business RBS Sempra, whichJPMorgan Chase & Co. bought for $1.7 billion. At the same time he expanded the bank’s equities and advisory business on the continent.

The European debt crisis has forced securities firms to scale back or close divisions that trade equities in Europe.UniCredit SpA (UGC), Italy’s largest bank shut its European equities unit in November, joining a growing list of companies including Nomura Holdings Inc., that have eliminated jobs in the region.

When McKinsey & Co. reviewed RBS in 2009, the management consulting firm came up with possible scenarios of what the future might look like for the board to consider. The worst-case, involving a deterioration in the global economy and RBS (RBS)losing market share, was headed “Nuclear Winter,” according to a former RBS executive who helped to devise the strategy. The executive, who declined to be identified because the talks were private, said that the sovereign debt crisis and new regulation, including the planned insulation of consumer banking as outlined by the Independent Commission on Banking in September, had made the reality much worse.

Fleshed Out

The overhaul, which will be outlined in brief this week and fleshed out when the bank reports year-end earnings on Feb. 23, will call for the transformation of RBS into a U.K. and U.S.-focused consumer bank and lender to companies. The firm will retain its payment-processing arm under the plan along with a smaller investment bank focused on underwriting and trading debt, the people with knowledge of the matter said.

RBS spokesman Michael Strachan and Andrew Whitehouse, a spokesman for McKinsey & Co. in London, declined to comment.

The pending move marks a return to how the bank looked in 2004 “before the GBM runaway growth phase,” according to Bruce Packard, analyst at Seymour Piece Ltd. in London.