RBS 2008 Annual Report Download - page 9

RBS Group Annual Report and Accounts 20088
Divisional review continued
achieved a particularly strong performance, with high volumes
of customer activity and flow trading resulting in a 40% increase
in income from rates trading to £3,543 million and 55% growth
in currencies income to £1,697 million. The Sempra Commodities
joint venture performed well in the nine months after its formation,
with GBM’s commodities income reaching £778 million for the year.
Equities saw reduced customer flow and write-downs on trading
positions as markets deteriorated rapidly. Credit markets achieved
some successes in arranging debt financing for its customers
but remained severely affected by market dislocation.
The task that GBM faces is to rebuild a business in which profit
is sustainable. We start from a very solid foundation of strong
underlying revenues. In addition, we enjoy global top five rankings
in corporate lending, foreign exchange rates, commodities and
interest rates and options. Our problems have largely arisen in
trading structured credit products and taking significant longer
term underwriting risk. In doing so, we strayed from the model
which had originally brought us success: of focusing on the
needs of our customers and trading in markets only in order to
support them. As a result, our balance sheet has grown in ways
that added risk without corresponding returns.
Strategic review
Following the review, GBM intends to focus its business around
its core corporate and institutional customer set across the
world. These clients are global in nature and are multi-product
users. GBM will deploy capital and resources in support of this
customer base and will continue to arrange and distribute credit
(loans and bonds) and build sustained competitive advantage
in its core financing, risk management and investment products,
and flow trading businesses.
RBS is renewing its commitment to product areas where GBM
has market-leading competitive positions across its customer–
centric origination, advisory and trading activities. It has strong
market positions in loans, bonds, foreign exchange, rates,
commodities and equities and will drive these businesses,
restructured where necessary, in a focused manner around
customers’ needs. GBM will discontinue all illiquid proprietary
trading activities and correlation trading in equity and credit
markets. It will drastically scale back activity in structured real
estate, leveraged and project finance, and exit lending in these
areas entirely. All businesses, and notably GBM’s asset finance
businesses, will be managed within strict capital guidelines.
Globally, the intention is for GBM to move increasingly towards
a hub-and-spoke model. Risk will be managed from regional
hubs. It is intended that distribution and coverage will be
delivered from a mix of hub countries and a scaled-back
presence in some local offices. The aim, over time, will be to
reduce much of the on-shore trading activity outside the key
financial centres.
Assets, products and geographies that fit GBM’s new client-
focused proposition will be defined as core and will remain
within the division. Assets, business lines and some geographies
that are non-core will be transferred to the new Non-Core
Division. These non-core activities accounted for approximately
£205 billion of third party assets at end 2008.
None of this will be easy. The difficult economic environment
around the world will make 2009 another challenging year. We
are confident, however, that at the core of GBM lies an excellent
franchise which can deliver enduring profitability to the Group.