Overview And Analysis Of Royal Bank Of Scotland Finance Essay

The construction and aims of this study will include five chief subdivisions:

Introduction of RBS background and study lineout.

Analysis of both internal and external strategic issues of the company utilizing a assortment of theoretical accounts. Therefore to bring forth a macroscopy position of its current and future public presentation.

Coevals of strategic options based on above analysis for RBS.

Evaluation of determination devising procedure and standards theoretical account sing the optimum scheme that best utilize company resources and competences of RBS.

Further illustrations sing execution issues arised from the specific strategic program.

Our scheme will be developed based on the basic design school theoretical account of scheme preparation ( Minzberg, 1990 ) . This is illustrated as below.


2.1 External Analysis

To analyze which schemes RBS can follow to stay successful and competitory in the banking industry, external analysis has been undertaken at a macro and industry degree.

2.1.1 PESTLE Analysis

Main Point

Relevance to RBS


HM Treasury holds a 70.33 % commanding shareholding in RBS, through UK Financial Investments Limited.

RBS ( Mar ’09 ) announced the closing of its revenue enhancement turning away section, assisting it avoid ?500m of revenue enhancement through direction of assets. Government ownership was a major factor in this determination, given that revenue enhancement turning away leads to less gross by authorities. Consequently, one of RBS ‘s gross watercourse has been shut-off.

The following general election will take topographic point on or before Thursday 3 June 2010.

As the authorities holds a bulk interest in RBS, a alteration of authorities ( or hung Parliament ) would take to a alteration of determination shapers. This could impact the strategic way of RBS, e.g. the current Labour authorities decided to shut the insurance arm, whereas another authorities may make up one’s mind to concentrate more on insurance than retail banking.


UK Bank rate – 0.5 % ( as at 04/11/2009 )

Figure 1

Base rates have lowered globally and may be good intelligence for clients on tracker mortgages. However, it is non necessary for RBS to go through the low involvement rate on to clients.


Figure 2Higher libor rates reflect greater cost to establishments to impart to one another. With freezings in sweeping recognition markets since 2007, houses are recultant to impart due to concerns over increased counterparty hazard.

Consequently, it becomes harder for Retail Banking houses such as Natwest to impart to clients ( persons or little concerns ) .


Inflation anticipated to travel farther into negative district in 2010, hiking families ‘ existent incomes and demand for mortgages. Clients may merchandise gold as a hedge against inflationary motions.

Figure 3


Global unemployment increased by 18 million people between 2007-09. Highest degree in the UK for 14 old ages ; in July 2009 unemployment was at 7.9 % ( BBC News, 2009D ) . Similar tendencies in different locations illustrated at a lower place, as at 2009:

EU – 9.4 %

US – 9.4 %

South Asia – 5.1 %

East Asia – 4.4 %

Higher unemployment amongst qualified professionals enables RBS to ‘cherry choice ‘ new recruits at a lower pay.

The fiscal services compensation strategy ensures clients can claim back up to ?50,000 of their sedimentations should a bank be unable to pay back their sedimentations ( Financial Services Compensation Scheme, 2009 ) .

Helped instil trust in Bankss as clients will go on to salvage with them because they know they can acquire their money back.


The velocity at which RBS can develop their IT systems to react to new technological possibilities.

RBS will necessitate to look at their bing IT systems and measure whether to utilize bing bequest systems or redesign their full IT architecture.

Volume of machine-controlled payments will lift significantly, whilst the usage of checks will fall significantly. Furthermore, ‘straight through processing ‘ ( STP ) enables automated fund transportations between histories.

Due to the mechanization of payments, these procedures could be outsourced to cut down costs.

The little payments market may be revolutionised through the development of contactless payment methods ; hence displacing hard currency as the cosmopolitan payment method by 2012 ( Keynote Market Intelligence 2008 ) .

RBS will necessitate to carefully supervise the developments of contactless payment engineering ; with a focal point on the figure of cards in issue.

Option to outsource and offshore operations nowadayss chances to cut down costs

RBS need to look into the possibility of outsourcing operations to cut down costs and remain competitory.


New banking ordinances: Change from The Banking Code ( March 2008 ) to The Financial Services Authority ( FSA ) retail banking behavior ordinance ( November 2009 ) .

This ordinance provides valuable protection for clients and explains how fiscal establishments are expected to cover with clients daily. This set of ordinances will impact the manner in which RBS trade with current and nest eggs account clients every bit good as payment services, loans and overdrafts, but it does non cover mortgages or insurance.

The Lending Standards Board Limited ( LSB ) became responsible for monitoring and implementing conformity with a new Lending Code ( as at 02/11/2009 ) .

A alteration in the Lending Code will impact the manner RBS is required to cover with current history overdrafts, loans, and recognition cards provided to personal and little concern clients.

Capital demand set by Basel II.

Basel II is a banking ordinance which governs the capital modesty degree that a bank is required to keep on monies received. If, as a consequence of the current economic crisis, this modesty degree is increased so RBS would be required to maintain a higher per centum of monies received from clients, with less being invested elsewhere.


Media focal point on societal and environmental impact of investing determinations.

RBS received negative media attending for puting in ‘environmentally damaging investings ‘ . ( http: //www.guardian.co.uk/environment/2009/dec/02/rbs-public-money-investments )

Greater focal point on sustainable banking with the launch of the ‘sustainable banking awards ‘ .

RBS will necessitate to guarantee integrating of environmental issues into determinations. RBS may develop new merchandises and services to supply environmental concerns with easier entree to capital.

Motions to battle clime alteration

Rubidium can raise and deploy capital for more low C activities through its Asset Management arm. Advisory services could besides function more clean-technology companies.

The Economist. ( 2010 ) . Briefing: Tightening Economic Policy. The Economist, 394 ( 8669 ) , 76-78

British Bankers Association. ( 2009 ) . BBALIBOR. Available from: www.bbalibor.com

The Economist. ( 2010 ) . Storm Before The Calm. The Economist, 394 ( 8669 ) , 36-37

2.1.2 Industry Life Cycle ( Financial Services )

Figure 4

With a huge sum of nonprescription ( OTC ) derivatives trades tied up in Lehman Brothers, the consequence on counter party hazard ( and systemic hazard ) was highly inauspicious for any bank or agent exposed to the Wall Street house, including RBS. RBS had a gross exposure to Lehman Brothers of about ?1bn ( Sept 2008 )[ 1 ]. However, such losingss were partly offset by RBS ‘ ?12bn rights issue earlier in 2008 and other hedges.

Despite diversifying, the important exposure to bad loans and losingss suffered by RBS in the fiscal twelvemonth stoping 2008 called for authorities intercession. RBS is undergoing a major restructure in an effort to concentrate on the most profitable concern units in the long-run scheme while extenuating hazards. Competition remains ferocious as retail and investing Bankss are viing for the same concern as their rivals, which has shrunk in size since 2007.

Traveling frontward, as the planetary economic system and fiscal services sector combats uncertainness and industry downswing, countries of focal point for RBS prevarication in strategic options lie in countries of controlled hazard and increased transparence such as the Exchange Traded Derivatives ( ETD ) market.

2.1.3 Porters 5 forces

Buyer Power

High: Government inadvertence exposes private investors to retreat funds/assets

Low: Mortgage borrowers have limited power due to higher sedimentation demands

Low: Borrowers face tighter recognition cheques

Low: Industry consolidation imposes less competition. Therefore fewer picks for consumers consequences in low bargaining power.

Supplier Power

High: Fewer providers of banking merchandises due to consolidation

High: Higher border demands due to increased counterparty hazard

Low: The cost of losing bing clients is greater than geting new clients

High: Supply of hard currency and quantitative moderation is governed by BoE, hence, Central Bank has greater power

Low: Increased fight psychiatrists net income borders

Menace of Substitute

High: Costss to consumer of exchanging histories is minimum ( if any )

High: Clients can seek cheaper fees/rates from independent agents instead than full-service investing Bankss

Barriers to Entry

Low: High grade 1 capital ratio demands

Low: Tighter industry ordinances ( www.fsa.gov.uk )

Low: Existing Bankss possess greater market portion

Low: The failure of Bankss in recent old ages, e.g. Northern Rock, Lehman Brothers may discourage new entrants

Low: Incentives offered by bing participants in the market, e.g. ?5 paid to clients of HBOS each month ( www.bankofscotlandhalifax.co.uk )

Competitive Intensity

High: RBS faces competition from a smaller figure of rivals in the UK across different concern lines, e.g. chief menace in Corporate Banking comes from HSBC and Barclays ( rbs.co.uk )

High: Liquid crisis has pressurised Bankss to impart carefully to other Bankss and consumers

Low: Strategic confederations ( e.g. Lloyds and HBOS, Bank of America and Merrill Lynch ) avoid the menace of Bankss neglecting and besides enable greater economic systems of graduated table therefore doing consolidation attractive during an industry downswing

High: Government owned establishments, e.g. Lloyds and RBS are looking to reconstruct client assurance in their trade name names

High: Small distinction between merchandises and services offered by Bankss for risk-averse clients

MarginFirm Infrastructure

Regulatory Compliance – Legal Compliance – Information Technology

Human Resource Management

Due to a more competitory occupation market RBS have increased the academic demands for the Global Banking & A ; Markets division alumnus strategy from 320 to 360 UCAS points. Structured preparation programme for alumnus entry within all divisions. Attractive and competitory wage bundle in order to pull and retain high quality employees.

Technology Development

Outsourcing straight through payment processing ( STP ) to cut down costs. Technology promotions, such as ‘C Screen ‘ developed by Euronext, can be implemented to increase the efficiency in which pre-trade monetary values are discovered for OTC equity derived functions. Stay up to day of the month with engineering developments in electronic banking ( e.g. telephone, cyberspace, Mobile ) to cut down costs and demand in subdivisions.


Negotiate lower dealing costs for payment glade services ( for illustration those offered by Visa or Maestro ) to accomplish economic systems of graduated table, hence staying competitory.

Inbound Logisticss

Central Bank – Supply of money from cardinal bank to RBS.

Investors – Supply of money from deposits/investments.


Staff Training – Staff adequately trained to supply sound fiscal advice which reflects current market conditions.

IT System – Migrating bing information systems to a more technologically advanced platform, while understating break.

Conformity – Ensure all concern countries are to the full competent with a quickly altering regulative environment.

Outbound Logisticss

Retail Banking – Through NatWest, Royal Bank of Scotland, and Royal Scottish Assurance trade names.

Direct Retail – Credit card concern in the UK and Europe including Mint and Direct Line.

Insurance – Large general insurance supplier in Europe through trade names including Churchill Insurance, Direct Line and Privilege.

Selling and Gross saless

Strategy – Realign selling scheme to reconstruct trade name credibleness.

Gross Focus – With recent retrenchment, the house can concentrate on nucleus concern countries, in peculiar, institutional gross revenues for trade good hereafters and FX trading.

Estate Agent Programmes – Closer working relationships with estate agents to increase the house ‘s trade name consciousness in the mortgage industry.


Post M & A ; A Service – Deal squad can pass on with clients to reexamine any post-deal concerns.

Dedicated Gross saless Adviser – Periodic communicating with all clients to develop a positive relationship through exceeding client service.


Harmonizing to Johnson ( 2008, p.223 ) , “ A strategic concern unit ( SBU ) is a portion of an administration for which there is a distinguishable external market for goods or services that is different from another SBU ” . Once all of the SBU ‘s are identified, it will be much easier to develop concern degree scheme.

There are nine Strategic Business Units with in Royal Bank of Scotland Group Plc, they are:

Regional Markets:

UK Retail

Wealth direction

UK Corporate

US Retail and Commercial

Asia retail & A ; Commercial Markets

Europe & A ; Middle East Retail & A ; Commercial Banking

Global Banking & A ; Markets

Global Transaction Servicess

Ulster Bank

Current Issues facing RBS

RBS every bit good as the bing planetary Bankss that have experienced the recession will hold both themselves and their Governments faced with the job of retrieving evaporated capital. ( a demand to recognize issues, what are they )

The RBS Profit Contributions per SBU are calculated by averaging the 2008 – 2006 figures. Although the 2008 net income parts have been significantly affected by the fiscal clime it is of import to integrate these as they reflect the true value of the different SBUs.

To measure the strong point of each of RBS ‘s SBU it is imperative to see the diverse plus degrees. This allows for a more accurate image of the true profitableness of each group dependant on the assets invested. If an SBU requires a limited degree of assets yet produces a comparably high net income part this an attractive plus for RBS to keep.

McKinsey Matrix


UK Personal

UK Corporate

US Retail & A ; Commercial Banking

Europe & A ; Middle East Retail & A ; Commercial Banking

Factors finding Vertical Axes

Factors finding Horizontal Axes

Market growing rate

Market portion

Market size

Growth in market portion

Demand variableness

Brand equity

Industry profitableness

Distribution channel entree

Industry competition

Net income borders relative to rivals

Global chances

Macroenvironmental factors PESTLE

The McKinsey Matrix allows for research workers to place strengths and failings of assorted concern units based upon “ industry attraction, market growing rate, industry profitableness, size and pricing patterns, among other possible chances and menaces. ”[ 2 ]Based upon the placement on the assorted SBU ‘s a strategic determination can be made based upon: grow, clasp or harvest recommendations.[ 3 ]

Grow strong concern units in attractive industries, mean concern units in attractive industries, and strong concern units in mean industries.

Hold ( selective investing ) norm concerns in mean industries, strong concerns in weak industries, and weak concern in attractive industries.

Harvest weak concern units in unattractive industries, mean concern units in unattractive

industries, and weak concern units in mean industry.

2.2.3 Resource Based View

Threshold capablenesss

Threshold Resources

Personal and concern banking services runing under Royal Bank of Scotland and NatWest trade name names.

Private bank division supplying wealth direction services.

Financing, renting and dealing processing services for corporate clients.

Threshold Competences

Fierce cost film editing steps increase competition and cut down trust on UK authorities support.

Esteemed and extremely competitory alumnus preparation strategy to guarantee hiring of new endowment.

The development of the Leadership Excellence Profile ( LEP ) tool enables RBS to keep a successful and differentiated direction construction. Proper appraisal Centre and preparation strategy besides established to back up LEP.

The integrating of Ulster Bank and First Active expand the RBS engineering platform. This enhanced RBS ‘s nucleus retail systems to back up other currencies based minutess.

Capabilities for competitory advantage

Unique Resources

Strong and broad portfolio of direct retail channels through reputable trade names including Lombard Direct, Direct Line, Mint and The One Account.

Reputable and strong insurance trade names including Direct Line, Churchill Insurance, Green Flag and Privilege.

Highly regarded and reputable trade name name before fiscal crisis.

Ownership of Citizens Financial Group, fifth largest banking group in North America.

Core Competences

Centralised back office services for the RBS Group including hard currency direction, and desktop IT support for seeable banking and insurance trade names.

The divestment of monolithic RBS retail and commercial concerns in Asia Pacific enables RBS to concentrate back on its nucleus strength, good established retail banking, commercial banking, energy trading concern and insurance divisions in the UK and US.

2.2.4 McKinsey Matrix



Esteemed and extremely competitory alumnus preparation strategy.

Wide portfolio of reputable trade names in the Fieldss of insurance and direct retail ( e.g. Direct Line, NatWest, Churchill Insurance ) .

Ownership of Citizens Financial Group.

Greater accent on hazard direction.

The size and presence of RBS limits the possibility of the house being acquired.

Fewer Bankss viing for larger part of concern

Strong UK Retail and Commercial Banking division accounting for over 50 % of entire income over the old three old ages.

HM Treasury owns a 70.33 % commanding shareholding in RBS.

RBS trade name repute has been adversely affected by recent events.

High pitching ratio indicates that RBS has less capacity to take on more purchase.

Though operating disbursals increased, net runing income decreased ( 2007-08 ) thereby cut downing the bank ‘s borders.

Europe, Middle-East and Asia Retail and Commercial Banking divisions are low performing artists.



High unemployment degrees means that RBS could offer lower wage to new recruits due to higher demand for occupations.

Automated payments will lift significantly, leting procedures to be outsourced to cut down costs.

Contactless payment methods could displace hard currency as the cosmopolitan payment method by 2012.

Restore assurance in trade name name following economic troubles.

Stay up-to-date with technological developments in the industry ( for illustration telephone, cyberspace and nomadic banking ) to cut down costs and demand in subdivisions.

A possible alteration in authorities could take to a alteration in strategic way.

Motion from OTC to Listed Derivatives to get the better of counter-party hazards exposed in CDS market.

Prospects to develop presence in low C activities

Attractive Asia Retail and Commercial Banking industry.

Outsource and offshore operations to cut down costs.

Change in capital demand degrees.

Change in the Lending Code may negatively impact how RBS must carry on retail banking activities.

Clients may seek cheaper fees/rates from independent agents instead than full-service investing Bankss.

Higher LIBOR could do interbank loaning more expensive therefore triping higher involvement rates for consumers.

Possibility of hung Parliament would take to greater uncertainness amongst politicians and regulators thereby act uponing RBS ‘ growing chances.

With RBS comprising of retail and investing banking services, clients may choose for independent agents to besiege struggles of involvement.

2.3 Summary of Analysis

3 Generation of Options

TOWS Matrix

Strengths ( S )

Failings ( W )

Portfolio of trade names S1

Competitive alumnus strategy S2

Greater accent on hazard direction S3

Strong UK Retail and Commercial Banking division S4

State ownership W1

RBS trade name image W2

High pitching ratio W3

Decreasing runing income and increasing operational disbursals W4

Low public presentation in European, Middle-Eastern and Asiatic Commercial Banking markets W5

Opportunities ( O )

High unemployment degrees O1

Technological alterations O2

Restore assurance in trade name O3

Changing UK authorities O4

Motion to Listed Derivatives O5

Develop presence in low C activities O6

Outsource and offshore operations to cut down costs O7

Use strengths to take advantage of chances.

O2 + O7 + Outsource IT processes to cut down operational costs.

S1 + S4 + O3 = Realign retail concern unit in order to accomplish a higher client satisfaction evaluation while offering a high nest egg rate.

S3 + O5 + O3 = Engage more intensively in exchange trade derived functions.

Take advantage of chances to get the better of failings.

W5 + O1 = Hire higher quality staff with a lower cost to increase public presentation.

W2 + O6 = Increase focal point on environmentally friendly services/industries

W4 + O7 = Reduce operational disbursals by outsourcing non-core procedures.

Menaces ( T )

Change in capital demand degrees T1

Change in the Lending codification T2

Clients may travel to independent agents instead than full-service IB T3


Possibility of hung Parliament T5

Use strengths to avoid menaces.

Minimise menaces and avoid failings.

W1 + T5 = Decrease authorities ownership to understate the consequence of a hung parliament.

Ansoff / Market Options Matrix






Market Penetration

Merchandise Development


Market Development


3.3 Diversify in order to cut down hazard ( i.e. spread hazard ) ( may be an option to accomplish variegation through all options as opposed to holding it as an single option ) .

Implement the attack of “ narrow Bankss “ by John Kay. RBS may divide wholly the proviso of payments services from the creative activity of hazard assets. Therefore warrant client ‘s sedimentation.

Additionally, RBS can follow another attack proposed by Paul Volcker to divide proprietary trading from retail banking.

Both methods may cut down the cost of finance to a broad scope of hazardous activities and reduces the hardiness of future economic crisis influences. Therefore RBS can cut down the dependence on authorities support and better future profitableness.


BoE –