BREAKING UP IS A HARD THING TO DO....

Breaking up is hard to do is the signature hit by Neil Sedaka, but it may have been playing this week at 135 Bishopsgate as RBS warned on challenges it faces generally in moving its business forward and specifically with the divestiture of its Williams & Glyn banking business.  The state owned bank is plagued by several challenges at this time: a MBS settlement looming with US regulators, passing the BOE stress test later this year, and disposing of Williams & Glyn, a trade name (it really only came into use in the UK in the 1980s) which has the potential to become a material high street platform with almost 2 million consumer and 250 small business customers. It has the potential to be a stand alone challenger bank, or a significant division of Sabadell, Santander or Virgin.  

Taking these challenges one at a time, it must be possible to put a limit (albeit a large one) on the fine with the American authorities, which already is provisioned to the tune of nearly $6 billion. Surely this fine could not be a BoA size fine? Next, the upcoming stress tests. RBS has several strong qualities and capital is one of them - with CT1 equity currently well north of 14% and a well behaved tangible equity/RWA ratio, so I can't see any worries there. So that brings us to the spin out of Williams & Glyn, which must occur by the end of 2017 to comply with EU aid rules. I really feel for RBS on this front - the word in the press (take today's Times) is that the build out of a new IT system to support the bank will only go on line at the earliest this summer.  IT issues have plagued the bank given historical long term under-investment; evidence includes the IT outage during 2012 which left the bank not able to update customer balances and the more recent 600,000 failed payment episode last year. If the spin out doesn't occur, fines and penalties could also follow impacting its already weakened profitability profile. 

Other banks find ways to replicate their existing system for divestitures, however this didn't happen in this case probably because regulators and others may prefer a more robust platform to support a new bank. I can also only imagine the discussions with the regulator about capital, liquidity stresses and the like to for a new hypothetical stand alone bank must be challenging. Existing banks like Santander really have a big advantage when sitting at the negotiating table given their credibility with the regulator and ability to absorb new divisions, this would all suggest.  All of this really really speaks to the multiple layer of challenges of turning around a bank of this scale, dealing with chronic historical infrastructure underinvestment, de-leveraging assets, managing staff morale and lastly facing up to historical conduct issues. We all tend to focus on the costs of banking failure upon the financial markets and society at-large, but turning them around is an equally painful process too.



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