RBS 2013 Annual Report Download - page 27

25
Chief Executive’s review
The opportunity cost of our current approach
is clear. We have an 18% share of the GB
main current account market but less than
half our customers have a mortgage with us.
The same is true in different forms across all
our businesses and paints a clear picture of
untapped potential. I know this frustrates our
people, all of whom want to prove the worth of
this bank through better service to customers.
The lack of connectivity for customers is
a by-product of our own complexity. Too
many customers are forced to bank around
us; adapting their behaviour to fit with our
processes. It’s frustrating for them and value
destructive for us.
Our customers rightly demand that we are
competitive, in every setting and in every
sector. We currently carry the cost base of a
global financial services group when in fact
we are now largely a UK–based bank. Our
operating model means our customers and
shareholders end up paying for parts of the
business that cost too much and deliver too
little in their interests.
This needs to change.
RBS needs a strategy that will address the
weakness in our performance for customers,
so that we can provide acceptable returns to
our shareholders. The business review I have
conducted has revealed our key challenges,
but it has also given us a clear path to improve
the bank.
On every dimension our opportunity to
improve the relative and absolute performance
of the bank is significant. It is my job to make
sure our strategy for customers translates into
value for our shareholders.
2013 Financial performance
This bank has had an extraordinary five years.
Cleaning up a £2.2 trillion balance sheet whilst
addressing the many failings of the past has
carried a very heavy cost, which shows in
our results.
Even by recent standards, 2013 was a difficult
year. Regulatory fines, wide-ranging customer
complaints, technology problems and public
questioning of our integrity all weighed heavily,
and bring into sharp focus the job we have
at hand.
For the full year, we reported a pre-tax loss
of £8.2 billion. The loss includes £3.8 billion
of legacy litigation, conduct and regulatory
costs and £4.8 billion of impairments and
other losses relating to the establishment of
RBS Capital Resolution (RCR).
Looking at underlying performance, total
income was down £2.3 billion for the year,
primarily reflecting lower revenues from
the re-sized Markets business while costs
were only down £0.5 billion – pushing the
cost:income ratio towards the worse end of
our peer group at 67%.
Returns varied across our businesses, but
only UK Retail and Wealth delivered returns
above the cost of equity. That said, the bank
continued to make progress despite our
financial performance.
Our business milestones included completing
the run-down of another £29 billion of Non-
Core assets – ahead of plan and taking
the total reduction since Non-Core was
established to £230 billion – setting up the
RCR unit and reducing risk-weighted assets,
and hence our risk profile, by £66 billion, on a
fully loaded Basel III basis.
We also cancelled the £8 billion Contingent
Capital Facility with HM Treasury, reduced our
stake in Direct Line Group to 28.5% – in line
with our commitment to the EC – and we are
in advanced discussions to restructure the
Dividend Access Share.
It is clear that the underlying performance
over the last year underlines the need for us to
shift the emphasis from restoring the balance
sheet to recharging our performance.
Why we must change
Capital: The capital plan we announced in
November outlined a number of concrete
actions to place the bank on a sure footing.
Among them, the creation of RCR and the
flotation of Citizens Financial Group will allow
us to target a Common Equity Tier 1 capital
position of 12% or greater by the end of 2016.
The capital plan has been designed to allow
us to focus without distraction on improving
our operating performance.
We will do what it takes to reach and maintain
a prudent capital position.
Cost and Complexity: There was a
necessary complexity to running an
organisation with a £2.2 trillion balance sheet,
as ours was five years ago, but this need
has reduced as we have scaled the bank
dramatically down over recent years. We now
need to simplify our structure and cost base
to match.
RBS remains a complex bank. We can be
hard to do business with, costly to operate,
and complicated to work in. We have seven
customer-facing divisions as well as RCR
and central functions, many of which are
duplicated across divisions. Across this we
have hundreds of internal committees. These
are costly barriers to interaction between our
people and with our customers, meaning we
lose out too many times on the opportunity to
serve them with more products and services.
This complexity shows in our cost:income
ratio, which reaches 73% when fully loaded
to include the bank levy and restructuring
costs. Reducing costs and divesting
businesses in the bank will inevitably result
in reduced staff levels. We do not yet have
detailed plans for implementation and
as always we will deal with such matters
sensitively, talking to our staff before
communicating any such changes.
Trust and Reputation: Behaviour and
performance influence the perception of
worth. RBS carries huge reputational discount
due to the extent of bad headlines the bank
attracts. This carries through into our customer
and investor interaction and can only be
solved by a sustained improvement in the
quality of our earnings and meaningful change
in the way we deal with customers.
Our customers like and trust the people
they deal with, but not the bank itself. We
can change this by moving more of the
appropriate decision making and process
management closer to the people who deal
with customers.
Performance: Great companies know that
quality service goes hand-in-hand with
disciplined management; they chase down
costs intelligently so they can invest more for
their customers. They prioritise and invest with
relentless focus on the areas that deliver the
strongest, most sustainable returns.