Royal Bank of Scotland - Essay Example

?Royal Bank of Scotland – Report Introduction: The first decade of the twenty-first century has seen great changes in the political, economic, socialand technological external environment in which all businesses operate. The banking sector has been vastly affected due to the global economic crisis leading to a total collapse of some of the prominent banks in the country. The extent of losses and damage caused differed greatly and some of the banks were able to salvage the damage caused, although the threats caused by the external environment put them in a highly vulnerable state. The global economic meltdown which reached its ultimate peak in the year 2008, followed by the collapse of the Lehman Brothers, triggered off a series of negative setbacks within the banking sector, causing the government and Bank of England to intervene and prevent further damage. The Royal Bank of Scotland, UK’s second biggest bank, fell prey to the changes taking place within the banking sector, and suffered immensely in the financial crisis of 2007-2008. According to reports, the bank witnessed a massive fall in its stock prices during the year 2008 whereby 13% drop in its share price was recorded, leaving traders concerned about its increasing liabilities and stability in the face of the aftermath (The Telegraph, 2011a). This report on The Royal Bank of Scotland, aims to discuss, analyze and assess various key issues with regard to the performance of the bank, such as the external threats and challenges faced by it and the strategies adopted by the same to counter them. The Royal Bank of Scotland: Brief Overview The Royal Bank of Scotland (RBS) is an international banking and financial services company headquartered in Edinburg, UK, with various branches across Europe, the Middle East, Asia, and the Americas, catering to over 30 million customers worldwide. It offers a range of products and services to a wide range of customers including individual as well as corporate customers; through its subsidiaries such as Natwest, Ulster Bank, Direct Line, Charter One, Coutts, and Churchill. (RBS Group, 2012a). Its key corporate divisions include personal banking, corporate banking, retail and commercial banking, International banking, wealth management, and other banking and financial services. RBS is regarded as one of the largest and oldest banks in Europe and holds immense credibility within the banking sector. Recently, it featured in the top ten banks in the world, with total assets worth $2,342.66 billion (see Figure 1) and was ranked third in the UK with total assets worth $2,267.93 billion in the year 2010 (See Figure 2) (Relbanks, 2012). The group recorded an operating profit worth ?6.1bn for the financial year 2011-2012 up by 10% as compared to the previous year. The improvement in the bank's profitability was largely attributed to its excellent performance in the UK retail sector. Furthermore the improvement in performance could also be attributed to the bank’s 5 year improvement plan adopted in the year 2009, which entails improving customer service; restoring the bank to a sustainable enterprise and improving its risk profile; and rebuilding value for its shareholders. The customer driven strategy is the key competitive strength of the bank, and has helped it in sustaining its performance in the midst of external challenges and threats. (RBS Annual Report, 2012). PEST Analysis: The political, economic, social and technological factors affecting RBS are discussed below: Political factors: One of the biggest setbacks faced by RBS during the financial crisis was taking over of its ownership by the UK government following a crash in the credit markets. The bank faced severe problems in raising new capital and failed in its attempt to revive its plunging profitability. In the year 2008, the UK government which was worried about the state of the financial markets sought to take up 58pc in RBS for ?15 billion (The Telegraph, 2011b). Furthermore, the collapse of the bank during the financial crisis is largely attributed to the Labour government’s ‘light-touch’ regulatory regime (The Huffington Post, 2011). According to the FSA (Financial Services Authority) the key reasons behind the failure and near collapse of RBS was due to inadequate regulation policies apart from the failure of the top management and supervisory system. The Labour government was also largely held accountable for its general failure to maintain stability in the markets (BBC, 2011). Economic factors: There was a rise in public sector borrowing during February 2012 which rose by almost double than the previous year, to ?15.2 billion. Also, the UK consumer price inflation fell to 3.4% in February, which is recorded to be the lowest in almost 15 months. There was a sharp fall in the retail sales sector in the current year (RBS Group, 2012a). There was a fall in the economic growth rate in the UK which fell by 0.3% in the fourth quarter in the financial year 2011. The profitability of UK banks in general and RBS in particular has increased slightly over the past couple of years, which can be attributed to the improvement in the UK and US economy, which have stabilized over the years (KPMG Report, 2011). Social factors: The change in economic condition has brought about a simultaneous change in the social environment, whereby the bank has resorted to large scale layoffs in recent times. Recently, RBS announced laying-off of approximately 3500 employees as a part of its rebranding and reorganization strategy. Such large scale cuts are likely to negatively affect the global banking markets in the long run. According to the bank's Chief Executive Stephen Hester, the move is to ensure better customer service and focus on their consumers and to ensure stable returns to their shareholders (The Huffington Post, 2012). Furthermore, the highly unstable banking environment in the UK has resulted in a drastic rise in unemployment which in turn has led to rapid deterioration in the household incomes (Investment Week, 2012). Technological factors: Technology has fast become the backbone of all businesses. It holds immense power and significance with regard to providing improved care to the customers worldwide, in terms of ease of access to services provided by the banks, making payments etc. RBS boasts of one of the best payment systems providing access to over ?100 billion a day. It also has one of the largest ATM systems in Europe. RBS has also ventured into mobile banking, by introducing a specially designed app, which allows its customers to access all its key services through their smart phones. It has pioneered a change in the banking approach by venturing into the social media sector and provides services through prominent social networking sites such as Twitter and Facebook, thus ensuring ease of access to its customers worldwide (RBS Group, 2012b). Strategies adopted by RBS to counter the economic threat posed by the external environment: The economic environment in the UK is highly unstable at the moment, due to rising unemployment, massive job cuts and recession. This has triggered off a series of negative consequences from an alarming drop in the GNP to the rising unemployment, and from increase in layoffs to reduction in consumer confidence in the bank and in the overall banking sector. However, the bank has recently taken strong steps to rectify the errors made previously by resorting to massive job cuts. This is likely to reduce its liabilities and provide it with an opportunity to compete in the highly dynamic and unstable external environment. The reduction in payrolls is likely to provide the bank with more financial leverage and added capital, thus providing it with an opportunity to increase its profitability in the long run. Furthermore according to RBS's new strategic plan for the year 2013, the bank aims to focus on improving its activities by focusing on risk management and aligning its business to suit the external environment. The three core principles of its strategy include sustainability, accountability and increased customer focus. Risk management strategy will be centered on ensuring maintenance of adequate capital at all times; improving consumer confidence by maintaining its competitive position in the industry; delivering profitable returns and stabilize its growth process; and finally ensuring better access to funding and liquidity. According to its sustainability strategy, the bank proposes to actively engage in employee engagement to increase and improve their productivity; and becoming more responsible towards their customers and environment by adopting responsible banking approach. Finally the customer centric approach entails increasing customer confidence and expanding its customer base through a novel concept of helpful banking, whereby the bank will adopt a customer centric approach with regard to its retail banking sector, and reaching out to its customers. These strategies adopted by the RBS are likely to result in a positive impact on the bank’s performance and increase customer and market confidence. References: BBC (2011). RBS report shows Labour's failures, Treasury minister says [Online] Available at: http://news.bbc.co.uk/democracylive/hi/house_of_commons/newsid_9660000/9660492.stm [Accessed: April 5, 2012] Investment Week (2012). Lloyds and RBS at risk of fresh ?33bn loss [Online] Available at: http://www.investmentweek.co.uk/investment-week/news/2135780/lloyds-rbs-gbp33bn-credit-losses [Accessed: April 5, 2012] KPMG Report (2011). UK Banks performance benchmarking report [Online] Available at: http://www.kpmg.com/dutchcaribbean/en/Documents/Financial%20Service%20UK%20Banks%20Performance%20Benchmarking%20Report%20HY%20Results%202011.pdf [Accessed: April 4, 2012] RBS Group (2012a). Key facts about RBS [Online] Available at: http://www.rbs.com/about/business-strategy/key-facts.html [Accessed: April 4, 2012] RBS Group (2012b). Technology services [Online] Available at: https://www.makeitrbs.com/uk/rbs-leadership-and-professional-home/programmes/technology-services [Accessed: April 5, 2012] RBS Annual Report (2012). Financial highlights [Online] Available at: http://www.investors.rbs.com/download/slides/Annual_Results_2011_slidesV2.pdf [Accessed: April 4, 2012] Relbanks (2012). Top banks in the world 2011 [Online] Available at: http://www.relbanks.com/worlds-top-banks/assets-2011 [Accessed: April 4, 2012] The Huffington Post (2011). RBS Nearly Collapsed Due To Poor Management And Labour's Regulatory Regime [Online] Available at: http://www.huffingtonpost.co.uk/2011/12/12/bad-managers-and-labour-government-to-blame-for-rbs-failure_n_1142606.html [Accessed: April 5, 2012] The Huffington Post (2012). RBS Layoffs: Bank To Cut 3,500 Jobs In Investment Bank Unit [Online] Available at: http://www.huffingtonpost.com/2012/01/12/rbs-layoffs-bank-to-cut-3_n_1201630.html [Accessed: April 4, 2012] The Telegraph (2011a). Financial crisis: Royal Bank of Scotland set for turmoil after biggest fall in 20 years [Online] Available at: http://www.telegraph.co.uk/finance/financialcrisis/3105896/Financial-crisis-Royal-Bank-of-Scotland-set-for-turmoil-after-biggest-fall-in-20-years.html [Accessed: April 4, 2012] The Telegraph (2011b). Available at: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8363417/Royal-Bank-of-Scotland-investigation-the-full-story-of-how-the-worlds-biggest-bank-went-bust.html [Accessed: April 5, 2012] Appendix: Figure 1: Source: http://www.relbanks.com/worlds-top-banks/assets-2011 Figure 2: Top banks in the UK Source: http://www.relbanks.com/europe/uk Figure 3: Performance of top 5 UK banks Source: KPMG Report (2011). Read More