RBS 2008 Annual Report Download - page 6

5RBS Group Annual Report and Accounts 2008
The task we face
We are intensely engaged in finalising a strategic restructuring
plan for RBS. The goal is to correct those factors that made us
particularly vulnerable to the downturn and to adjust further our
business to reflect changes in the environment facing our
industry. While the plan will not be complete until the second
quarter of 2009, we have decided a lot already.
Our strategic plans will take three to five years to execute, given
the headwinds of economic downturn. Nevertheless, we expect
to make strong and purposeful progress each and every year.
Our aspiration is that RBS should again become one of the
world’s premier financial institutions, anchored in the UK but
serving individual and institutional customers here and globally,
and doing it well. We aim for AA category standalone credit
status and to rebuild shareholder value, along the way enabling
the UK Government to sell down its shareholding.
We should be known for our businesses and how we manage
them. We want to focus on enduring customer franchises, with
top tier competitive positions where we choose to compete.
Our businesses will target 15%+ return on equity and primarily
organic growth at rates consistent with the markets in which
they operate. Our businesses should reinforce each other with
shared products, customers and expertise. Our risks should be
diversified, well controlled and proportionate to the business
and customer opportunity.
In management style we want to be purposeful, to “make it
happen” for our customers and then for our shareholders. We will
anchor our efforts in strategic understanding of the businesses,
focusing on long-term, quality profitability. Our business mix
should be more biased to stable customer businesses than before.
We aim to rely less on volatile, unsecured wholesale funding.
Strategic Restructuring Plan
We have embarked on a sweeping restructuring of the Group
that will fit our activities to the goals above. While the details of
the Strategic Plan will be refined over the coming weeks, we are
now able to announce the following:
•We will create a “non-core” Division of RBS during the second
quarter of 2009, separately managed, but within the existing
legal structures of the Group and matrix-managed to
donating Divisions where necessary. This Division will have
approximately £240 billion of third party assets, £145 billion of
derivative balances and £155 billion of risk-weighted assets,
comprising individual assets, portfolios and businesses of the
Group that we intend to run off or dispose of during the next
three to five years. The specific timetable will vary in each
case, consistent with optimising shareholder value and risk.
Approximately 90% of the Non-Core Division will consist of
GBM assets, primarily linked to proprietary portfolios, excess
risk concentrations and illiquid ‘originate and hold’ asset
portfolios. The remainder will be risk concentrations, ‘out of
footprint’ assets and smaller, less advantaged businesses
within our Regional Markets activities across the world.
As part of this effort our representation in approximately 36
of the 54 countries in which we operate will be significantly
reduced or sold. We will remain strong in all our major
existing global hubs, however.
Given the commercial and human sensitivity of these issues,
detail on this will not be given until the interim results.
The income, expenses, impairments and write-downs
associated with the Non-Core Division in 2008 were
approximately £3.9 billion, £1.1 billion, £3.2 billion and
£9.2 billion respectively.
•In addition to eliminating expenses associated with the Non-
Core Division, the restructuring plan will make efficiency savings
across the Group, aimed at achieving run-rate reductions by
2011 of greater than £2.5 billion (16% of 2008 cost base) at
constant exchange rates. This will involve re-engineering and
other measures and, regrettably, reductions in employment.
This target excludes any impact of inflation, incentive pay
movements or cost reductions arising from business exits or the
impact of new projects (if any). It includes the £0.5 billion of
ABN AMRO integration benefits previously announced but not
reflected in 2008 expenses. We will book one-off charges
against these actions over the next three years, with run-rate
cost savings expected to provide ‘payback’ in 1.5 to 1.75 years.
•We plan to retain each of our major business Divisions since
we believe, with intensive restructuring, they can meet the
attractive business characteristics outlined as targets above.
In many cases the restructuring of these businesses to
achieve our goals will be far-reaching. The greatest element of
restructuring will be in GBM. A substantial shrinkage of size,
product and geographic scope will take place. This should
leave GBM positioned around those of its existing core
strengths that rest on profitable customer franchise business
with significantly less illiquid risk overall.
•At all times we will responsibly compare the value to RBS
of each of our businesses with realistic alternatives and take
different actions if they prove compelling. The current state
of markets for financial assets and businesses offers little
immediate encouragement in that regard.
•Alongside our business restructuring activities will be
substantive changes to management and internal processes.
There will continue to be changes of personnel as we promote
and reassign internal talent and add to our ranks externally.