Royal Bank of Scotland

History of RBS:
Royal Bank of Scotland is one of the leading financial institutions of the world with the history of over two hundred years and presence throughout the world. The Bank was founded in 1727, in the city of Edinburgh and since then has expanded its operations in most countries of the world. The bank has expanded by successfully acquiring various well known and leading global financial institutions. The Bank has many division namely UK personal division which comprises of retail, commercial and corporate banking and wealth management services. The Banks has also diversified its business into other ventures including insurance business by the name of RBS Insurance which has become the UK’s number two general insurer and number one group lines insurer by gross written premiums.
The RBS group has more than 40 million customers worldwide, and it has some 2,278 branches and 118 business centers in UK alone. The Bank provides services like credit cards, mortgages, loads, savings, investments and financial planning, insurance services, digital banking and etc.

Competitive Strategy of Royal Bank of Scotland
The Royal Bank of Scotland is one of the premier banks in the world with its worldwide presence. In 2004 the bank was ranked as the second largest in the UK and Europe, and the fifth largest in the world (Gupta.S & Srikanth.G, 2004). Being the leading financial institution, RBS aggressively went expansion policy to diversify its operations. The bank followed both organic and inorganic approach as its growth policy; it acquired popular financial institutions like Natwest and ABN Amro to name a few. Despite acquiring some its biggest competitors, the bank is facing fierce competition from other players in the banking industry which forced it to look into more risk taking ventures.
The RBS group announced a major restructuring plan in 2008 according to which bank is looking to operate mainly from UK with smaller and more focused global operation (RBS Group, Annual result, 2008). Where as previously, the bank was looking to diversify in international markets through takeovers of regional banks but the present restructuring suggests that the bank is looking to adopt a more focused strategy.
The bank is trying to improve its liquidation by enhancing its liquid assets resources, improving its cash deposits from customers and other banks by offering better rate of return. In future the bank plans to issue to shares to raise equity finance up to $25 bn, this will improve the bank’s liquidity and capital position.
RBS products, markets and competitors
Royal Bank of Scotland (RBS) offers a wide range of banking services which bifurcate into the following:
–          Private Banking
–          Personal Banking
–          Business Banking
–          Corporate Banking

Private Banking
RBS offers its specific customers with premier banking services which are tailored to meet their specific needs. These services provide these customers substantial benefits which are distinct to them. Some of the major benefits provided are:
–          Each customer’s personal relationship manager. This feature allows the customer to address his or her complaints to a single individual instead of calling up the helpline and following a tedious routine.
–          Customers have 24/7 access to telephone banking. Since professional banking advisers are involved at the back-end, therefore this enhances the reach of customers to banking professionals who can provide sound advice over technical issues.
–          Furthermore customers are also provided with flexible current account, lending and savings options along with specialized mortgage and insurance services.
Personal Banking
Like most successful banks, personal banking is major revenue generator for RBS. Under this service, the individual account holders of the bank are provided with a wide range of current account and credit card options. Furthermore, they are also provided with numerous other services.
Business Banking
RBS also provides banking services to newer banks looking to start up. These services not only comprise of providing the financing but also providing much needed guidance on business planning. Furthermore, the bank’s Smarta Network was one of its kind and is aimed at providing practical guidance and tools for successful venturing into a new business. However, these banking services are focused on smaller businesses which have annual turnover below £1 million.
Corporate Banking
These banking services are focused on providing premier banking services for medium or large-sized businesses. Corporate customers are provided with specialist teams which comprise of industry experts and are tailored to meet specific needs. Furthermore, corporate banking also features extensive business support services.
The core market for RBS throughout its existence has been the United Kingdom and the Greater Europe. However, over the years the bank has expanded significantly into Asia Pacific but even to this day RBS generates most of its revenue from the Mediterranean. Besides that RBS has over 40 million customers across the globe and enjoys major presence in North America, Middle East and Latin America.
Some of the major competitors of RBS are Barclays, Citigroup and HSBC. In UK and most of Europe, RBS faces stiff competition from both Barclays and HSBC with Barclays in particular. However, elsewhere Citigroup enjoys a strong presence and therefore RBS faces strong competition from it. In Asia Pacific, HSBC is a major competitor of RBS.
Financial Highlights:
a)      Shareholder Value maximization
The stock prices of the Royal Bank of Scotland for the past ten years have been declining quite dramatically. In the year 2000 the share price of the banks was somewhere around £6.00, but in the current year 2010 the share price has dropped down to £0.4257. This shows that the shareholders of the bank have seen their wealth being depleted constantly over the past ten years.
a)         Return on Equity
The return on equity has been around 15% for the bank from the year 2004 to 2007, where as there is a negative return of -18.5% in the year 2008 because the group incurred a loss in that year.
b)         Leverage multiplier
This ratio measures the value of total assets of the firm covered by the amount of common equity. The ratio has been on the increasing side from 2004 to 2008. It was 19.2 in 2004, but reached up to 40.86 in the year 2008. The main reason behind this is that the total assets increased considerably while the common equity did not increase with the same ratio, it even decrease in the year 2008. This suggests that the bank financed most of its assets from debt financing rather than through equity financing
c)         Yield on earning assets
This ratio shows the gross rate of return on earning assets. In the year 2004, the yield ratio was 10.2% but showed a dip in the next four years from 2005 to 2008. This shows that the bank is earning a low rate of return on its income generating assets.
d)        Core deposits-to-assets
This ratio measures the availability of most stable funds used to finance assets. The bank’s core deposits ratio was on the decreasing patter from 2004 to 2008. It was 0.75% on 2004, 0.628% in 2005, 0.72% in 2006, 0.49% in 2007 and in 2008 it decreased further to 0.36%. This suggests that the bank has low cash balances in its deposits which can be used to finance the assets.
e)         Net loan-to-Assets
This ratio measures the share of assets to least liquid assets. The ratio has shown an increasing pattern from 2004-2008. It was 9.56% in 2004, 10.47% in 2005, 28.53% in 2006, 36.2% in 2007 and in 2008 it rose to 57.84%. This suggests that the share of assets which are least liquid is increasing in the total asset base of the bank
f)         Net loans-to-deposits
This ratio measures the share of deposits locked into loans. The ratio has shown an increasing pattern in five years time. It was 24.13% in 2004 and reached up to 171% in 2008.
Interest rate sensitivity ratios
g)         Net loan-to-Assets
This ratio measures the share of assets to least liquid assets. The ratio has shown an increasing pattern from 2004-2008. It was 9.56% in 2004, 10.47% in 2005, 28.53% in 2006, 36.2% in 2007 and in 2008 it rose to 57.84%. This suggests that the share of assets which are least liquid is increasing in the total asset base of the bank
H)        Sensitivity Ratio
This ratio measures whether the firm is asset sensitive or liability sensitive. If the ratio is less than 1 than the firm is liability sensitive and if it is greater than 1 then the bank is asset sensitive. In the five year period from 2004-2008, it was found that the bank is liability sensitive as the ratios were less than 1 in all those five years.
i)          Liquid Assets-to-earning Assets
This ratio measures the most liquid assets available to cover investment in earning assets. The ratio was very low in the period of five years. In 2004, it was 4%, 1.67% in 2005 and 2006, increased to 3.26%, while in 2008 the short term investments were sold off at maturity. This shows that the bank had fewer liquid assets available to cover the investment in earning
j)          Earning power
This ratio measured the proportion of earning assets in total assets of the firm. The earning power ratio showed an increase in the period of five years from 2004 to 2008. It was 27.9% in and went up to 64% in the year 2008. This is a good sign for the bank showing a large proportion of earning assets in the total assets of the bank.
k)         Asset Utilization
The Bank has a very low Asset utilization ratio in the period of five years from 2004-2008. This means that the bank is not utilizing its assets very effectively, it needs to increase its operating revenues to better utilize its total assets.
Tier 1 capital ratio
The capital ratio is used to describe the capital adequacy of the bank. Tier 1 capital is core capital which includes equity capital and disclosed reserves. It is the core measure of the bank’s financial strength from regulator’s point of view. It is composed of core capital which consists of common stock and disclosed reserves or retained earnings. The tier1 capital gives the measure of the bank’s equity capital to its total risk-weighted assets. The regulatory requirement for tier 1 ratio is 8% for the banks. The Royal Bank of Scotland is said to have a lower ratio than the required 8%, its tier one capital ratio is around 4.3%, excluding the preference share capital. With the inclusion of preference shares in its core capital, the bank is believed to have a ratio of 11-12%. RBS needs to make a right issue of approximately $12.5bn to improve its tier one capital ratio and to bring it to the average of European banks ratio of 6.5%.
Tier II capital Ratios
This ratio calculates the tier 2 capital adequacy of the bank. Tier 2 capital is a secondary bank capital but it is a broader measure than tier 1 capital ratio as it includes subordinated debt and some less certain assets such as revaluation reserve plus tier capita The tier 2 capital is the very important measure for depositors, counter parties and holders of banks’ debt apart from the subordinated debt. It reveals the proportion of assets that the bank can lose if the loss is entirely absorbed by equity holders and holders of subordinated debt. RBS has a satisfactory tier two capital ratio.

References: n.d. The Top 10 Global Retail Banks-Growth strategies and best practices of the leading players. Retrieved July 13,2010 from
Gupta.S, Srikanth.G. 2004. The Royal Bank of Scotland’s Growth Strategies. Retrieved  July 13,2010. From,Acquisitions,Alliances%20and%20Synergies/MAA0021.htm
Lferlaak. 2005. S.w.o.t Analysis Of The Banking Industry?. Retrieved July 13,2010.from October 2009. Trends in the banking Industry. Retrieved July 13,2010           from
RBS Group. n.d. Group Structure. Retrieved July 13, 2010.from
RBS Plc. N.d. share price and dividends. Retrieved July 13,2010. From;DisplayType=Line;Period=560

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