Royal Bank of Scotland to Cut Significant Percent of Employees

Royal Bank of Scotland blog update is courtesy of The Economic Times.

The Royal Bank of Scotland (RBS) with over 700 branches with most mainly in the UK and Ireland have announced massive job cuts to their investment banking division. 

Britain’s state-rescued Royal Bank of Scotland will axe up to 14,000 jobs by 2019 in a retreat from investment banking, the Financial Times reported Wednesday.

The daily business newspaper, which cited people familiar with the matter, said the lender could shed as much as 80 percent of its investment banking division, which employs a total of 18,000 people.

A spokeswoman for RBS, which is about 80-percent state-owned, declined to comment on the press report.

The Edinburgh-based bank had already announced last week that it would end investment banking in the Middle East and Africa and “significantly” reduce its presence in Asia and the United States after posting its seventh successive annual loss.
Losses after tax totalled £3.47 billion ($5.40 billion, 4.74 billion euros) last year after a £4.0-billion writedown on Citizens bank, part of its US operations.

The performance was however much better than in 2013 when RBS had posted an annual net loss of almost £9.0 billion. Stripping out the writedown and other items, RBS recorded an operating profit of £3.5 billion for 2014. 



2014 Investment Banking Trends: Is the Truth Stranger than ‘Fiction’?


Krishnan Ranganathan, in his recent article published at on 18 June, 2014, remarkably delineates the trends of investment banking in 2014. He astonished the readers by comparing predictions and realities of debt capital markets, equity capital markets, mergers and acquisitions, and syndicate loans from first five months of 2014.

The future of investment banking was a hotly contested point at the beginning of the New Year. How have industry predictions fared in the first five months of 2014?

Six months ago, around the beginning of the New Year, an onslaught of publications, opinions, views and surveys (what I call “fiction” here for argument’s sake) emerged on what could be in store for banks in 2014. A highly debated area was the future of investment banking (IB), where the outlook was starkly divided. This article summarizes the key predictions from a gamut of such reports and attempts to decode the predictions vis-à-vis the results in the first five months of 2014.

IB revenue is taken as an aggregate of Debt Capital Markets (DCM), Equity Capital Markets (ECM), Syndicated Loans, and Mergers and Acquisitions (M&A).

Debt Capital Markets (DCM):

Prediction: Bond deal activity is expected to rise significantly, which would represent an all-time record year for bonds. EMEA and Asia are likely to be more bullish on bonds. Some also felt that with the Fed tightening its monetary policy, we can expect rising interest rates on corporate debt in 2014. Refinancing is likely to drive growth in debt issuance.

Reality: Fixed income (FI) continues to play second fiddle to equities, thus triggering investments out of FI. Also, issuer activity is seeing lukewarm interest due to additional Fed tapering and ascending interest rates.

  • Global Supranational, Sovereign, Agency (SSA) volume has shown a decrease of 16% on 2013 YTD and represent the lowest total since 2007 YTD. A mere 2,620 deals have come to market thus far in 2014, the lowest level since 2000 YTD.
  • Global covered bond activity in 2014 stands at its lowest level since 1996.
  • However, the global PIK (Payment In Kind) bond market seems to have done decent business, with the volume, $4.2bn, the highest since 2007.

Verdict: Off track.

Equity Capital Markets (ECM):

Prediction: Resurgent IPO activity is widely believed to continue, especially in the US, where companies may be expected to use share offerings to fund growth. Admittedly, some shareholders are likely to be more resistant to dilutive follow-on deals as compared to Asia or Europe. While in Asia, share prices and the regulatory environment are seen as favorable to new issuances, in Europe, there is a need for liquidity coupled with shareholders’ interest in secondary offerings. Some experts believe weak valuations and shareholder resistance may lead to recapitalizations in the form of asset sales rather than share offerings.

Reality: Based on the most recent 2014 data, ECM came back with a bang last year after successive declines and is continuing to do well, with many issuers clearing their backlog in the light of improved economic conditions.

  • EMEA acquisition-related ECM volume is the highest YTD volume since 2009, with the IPO volume at the highest YTD level since 2007.
  • EMEA Financial Sponsor (FS)-related IPO volume is the highest YTD volume on record.
  • US-listed first follow-on volume is at the highest level since 2000 YTD, while the US-listed Chinese issuer cross-border ECM volume has already seen 16 deals and is the highest YTD volume on record.

Verdict: Somewhat On Track

Mergers and Acquisitions (M&A):

Prediction: Large cash reserves/commitments, opportunities in emerging markets and availability of credit in favorable terms are likely to improve deal sentiments in 2014. Improved consumer confidence and booming equity markets are the proverbial icing on the cake. The most active industries driving M&A are expected to be media, telecom and technology, followed by Pharma, healthcare and life sciences. The healthcare sector sees heavy pressure to spend and match competitors despite valuations acting as an impediment (while industry regulation is less of a catalyst). Energy, Power & Commodities are likely to remain lackluster, plagued by cost-cutting and non-core asset divestitures as well as their vested interest in building cash cushion.


Reality: While 2013 saw risks attributable to macro-economic parameters holding center stage and squeeze in fees on account of lower margins for bigger deals, the first few months in 2014 have seen a good degree of deals being announced, particularly from Private Equity players and corporates hoarding substantial cash buffers.


  • Global $10bn+ M&A volume (with 13 deals till now, the majority in Telecom and Healthcare, and the US taking the lion’s share) has seen a 75% increase compared to the same period last year and is the highest YTD volume since the last seven years in this category.
  • Global hostile M&A volume is up significantly and is at the highest YTD level since 2007. Asia Pacific-targeted Financial Sponsor (FS) M&A volume, driven largely by China, is at the highest YTD level on record and is nearly twice as high as in last year.
  • US Outbound M&A volume, with 555 deals, has reached the highest YTD level on record.
  • Global Technology sector M&A volume is up 94% compared to last year and is the highest since 2000 YTD.

Verdict: On track

Syndicated Loans:

Prediction: Market observers and survey respondents believe that syndicated loan deal activity will rise significantly, leading to a best year for loans since 2007. In the US, loan growth is widely expected to outpace bond growth because of a perceived investor shift toward floating-rate assets.


  • The average US-marketed syndicated loan margin is witnessing a fifth consecutive year-on-year decrease and is the lowest average margin since 2008 YTD. On the contrary, AeJ (Asia excluding Japan) G3 syndicated loan volume is at the highest YTD level since 2008.
  • Global second- and third-lien average loan pricing is at the lowest level since 2008 YTD. Leveraged loans account for 51% of European leveraged finance (leveraged loans and high-yield bonds) in 2014; YTD is down from a 65% share in 2013 YTD and the lowest YTD share on record.
  • However, volume for global amend & extend (A&E) loan facilities in 2014 YTD totals a record high and marks the fifth consecutive YTD increase in volume.

Verdict: Off track


Interestingly, most of the banking surveys seem to have been off the mark by a mile (at least in the first 5 months, with only M&A bucking the trend). I would stick my neck out and bet on M&A deals (again contrary to the majority view and skewing the “verdict” hopelessly!) ranking low on numbers while high on shareholder value. The recent Pfizer-Astra Zeneca episode is a case-in-point where companies are being extremely selective whilst working with a longer list of economic and industry parameters.


Investment Banks and BrokerDealers: Getting on Train or Getting Run Over By It

Steven M. Davidoff, the Law Professor and Deal Junkie of New York Times, explained in his recent blog at DealBook NYTimes that investment banking business is getting highly effected by not only poor economic conditions, but also increasingly new regulatory changes are constraining the potential of investment banking.

The world of Goldman Sachs, Morgan Stanley and the rest of the investment banks is being remade, squeezed by new regulations and record low volatility in the markets.


So what will the new world look like?

Gary D. Cohn, the president of Goldman Sachs, described the current market well last month when he noted the “difficult environment” for investment banks. He said that “what drives activity in our business is volatility.” If markets never move, he continued, “our clients don’t need to transact.”

The decline in volatility has sharply reduced already low investment bank trading revenue. Citigroup’s chief financial officer, John C. Gerspach, said at a recent conference that Citigroup’s trading revenue could be down 20 to 25 percent in the next year. Other banks are expecting similar declines.

The continuous amendment of new rules and regulations in the investment banking are now viewed by investors and broker-dealers as roadblocks to their investment goals. In this situation, investment banks are being forced to find new ways to maintain revenue or to shrink. Conventionally, investors and broker-dealers believed that these banks are open to make to choices to reorient their business structure, but in reality their options are confined now.

For instance, Morgan Stanley Group is diverting its focus more in wealth management from traditional investment banking as they get aware of market trends in the investment banking sector. However, they do not leave investment banking sector entirely, but they start capital allocation in other finance sectors to stabilize the overall revenue, if for any uncertain reasons investment banking get saturated.

Other banks like Citigroup and Bank of America, are getting focused in retrenchment activities. While, smaller investment banks like Barclays’ are in free fall, departing top executives. Some have announced to cut their bank’s working capital in half, and some reduced their quarter of human capital.

If you are wondering whether the investment banking comes to an end, well this might not be the case. Except all these rushes in the investment banking sector, Goldman Sachs, has played its strengths and remain focused towards trading and traditional investment banking. Goldman is looking to change as little as possible, betting that the economy will boost again. One good reason is that there are more chances that new entrants will try to avoid investment banking sector and rather invest in other capital investments.

As Gary D. Cohn, the president of Goldman Sachs, described, “What drives activity in our business is volatility.” If markets never move, he continued, “Our clients really don’t need to transact.”

Euronext anticipated its IPO value to be more than $2.4 Billion this year update courtesy of extracts from today’s NYT DealBook

Euronext’s initial public offering looks like a tough sell. The firm is seeking a valuation of 1.3 billion euros to 1.8 billion euros when it floats later this month. Anchor investors have a vested interest in backing the issue. But for other buyers, it is a leap of faith.

The IntercontinentalExchange Group is selling down its holding in the unit after inheriting the business through its purchase of NYSE Euronext last year.


The NYSE Euronext cash markets operations.

Euronext’s initial public offering looks like a tough sell. The firm is seeking a valuation of 1.3 billion euros to 1.8 billion euros when it floats later this month. Anchor investors have a vested interest in backing the issue. But for other buyers, it is a leap of faith.

The IntercontinentalExchange Group is selling down its holding in the unit after inheriting the business through its purchase of NYSE Euronext last year.

Some of the I.P.O. shares have already been allocated. Cornerstone investors, mainly banks, are to buy a third of the shares at a slight discount to the I.P.O. price, in return for a three-year lockup. As users, their involvement makes sense.

Ten percent of the offering is set aside for retail investors, with another 2 percent set aside for other institutions. That may add some needed tension to the process.

Euronext’s pitch is that it will benefit from European economic recovery, a global shift from bonds to stocks, and increased capital markets activity as European banks scale back lending. It also wants to diversify away from plain-vanilla equity trading into derivatives. As a result, the group expects to achieve average annual revenue growth of 5 percent, and margins on earnings before interest, taxes, depreciation and amortization of 45 percent.

Those targets may be more conservative than some peers. But they look a stretch given recent performance.

Revenue fell 11 percent in 2012 and 3 percent in 2013. The London Stock Exchange increased revenue in both years. First-quarter revenue in the current year also fell from a year earlier. Annual Ebitda margins were last above 45 percent in 2011. The forthcoming Financial Transactions Tax, and a possibly secular reduction in trading activity, could restrict any upturn in volumes.

The full article can be found at NYT DealBook.