Competing in the ‘new normal’ Merrill Lynch Banking & Insurance CEO Conference 29 th September 2009 Stephen Hester, Group CEO, The Royal Bank of Scotland Group
Important Information Certain sections in this presentation contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation � Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believes’, ‘should’, ‘intend’, ‘plan’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions. � In particular, this document includes forward-looking statements relating, but not limited, to the Group’s interest rates, credit rates and availability, competitive environment, return on equity, funding costs, business performance, cost reduction programme, cost income ratios, cross sell revenues, run-off rates for non-core assets, deposit growth rates, loan to deposit ratios and asset protection scheme participation. Such statements are subject to risks and uncertainties. For example, certain of the such disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document � include, but are not limited to: the extent and nature of future developments in the credit markets, including the sub-prime market, and their impact on the financial industry in general and the Group in particular; the effect on the Group’s capital of write downs in respect of credit market exposures; general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing. The forward-looking statements contained in this presentation speak only as of the date of this presentation, and the Group does not undertake to � update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The information, statements and opinions contained in this presentation do not constitute a public offer under any applicable legislation or an offer � to sell or solicitation of an offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments. Slide 2
Agenda What is the ‘new normal’? RBS’s current position Re-tooling RBS Measuring success Slide 3
Focus of this presentation � RBS is being radically restructured. Huge changes are well underway reducing balance sheet, risk, product, client & geographic scope, cost base and changing the culture & management. � Those changes constitute perhaps the most radical bank restructuring of modern times. However they are useless unless what is left, “Core RBS”, is strong and can compete successfully. � This presentation focuses on the restructured “Core RBS” and how we can compete in the ‘new normal’. Slide 4
What is the ‘new normal’?
A return to economic growth, but constrained by the unwind of past excesses Macro Factors Examples Implications UK / US Current Account Position as % of GDP 1 4 % Current Account deficit / GDP 3 % 2 % 1 % - (1)% (2)% (3)% (4)% � Low interest rate environment to (5)% continue for a while (6)% � Growth resumes (7)% Dec-70 Dec-76 Dec-82 Dec-88 Dec-94 Dec-00 Dec-06 � Limited investment growth / UK C.A. / GDP US C.A. / GDP opportunities � Existing economic imbalances still need to be addressed – Rise in private sector UK 400% process currently underway � Demand for credit improves debt as % of GDP 2 slowly – focus on saving rather 300% than increasing borrowing � Fiscal and monetary squeeze 200% as government support 100% withdrawn � Restrained house price growth 0% 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 � Constrained consumption growth � Pace of recovery expected to be moderate Household Non-financial corporate Non-bank financial corporations � Subdued volumes and hence 107 UK Real GDP index 3 non-interest income growth 1990 (Start of recession = 100) 105 1973 103 101 1979 99 97 2008 95 93 1 Source: DataStream t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 Slide 6 2 Source: Bank of England 3 Source: DataStream, RBS Group Economics forecasts
Banking industry to face a ‘new normal’ operating environment as a result Micro Factors Examples Implications Number of US Financial Institutions 1 13,000 11,000 9,000 � Rational competitive environment 7,000 � Increased opportunity for existing � Continued focus on in-market 5,000 top tier franchises consolidation 1995 2000 2005 2008 Bank Funding Spreads over GBP Swaps 2 � Competition for deposit funding � Participants exiting non-core / 1200 intensifying Spread over GBP Swaps subscale franchises 1000 800 � Balance sheet growth muted � Impairments at elevated levels 600 forecast to continue 400 � Risk activity stays subdued (structured and leveraged credit) 200 � Availability and cost of 0 wholesale funding improving Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 � Focus on disciplined margin but not to past levels Iboxx GBP T1 Iboxx £ UT2 Iboxx £ LT2 Iboxx Senior GBP rebuild and cost management Indicative Return on Equity Impacts 3 � Increased regulatory capital � Higher risk weightings and strong requirements and political Client and regulator Industry driven trends ‘through the cycle’ capital ratios driven trends scrutiny Capital Higher optimisation Cost liquidity � RoEs stay below previous peak Increased management funding Higher ~ 20 but support capital rebuild Increased costs asset 15+ capital margins requirements ~ 8-10 2007 pre- Potential Potential 1 Source: FDIC Slide 7 crisis worse case long term 2 Source: Iboxx scenario outcome 3 Source: RBS Analysis
RBS’s current position
2013 Vision for RBS To be one of the world’s most admired, valuable and stable universal banks To return to 15%+ sustainable RoEs , powered by market-leading businesses in large customer-driven markets To deliver its strategy from a stable AA category risk profile and balance sheet The business mix to produce an attractive blend of profitability, stability and sustainable growth – anchored in the UK and in retail and commercial banking together with customer driven wholesale banking, and with credible growth prospects geographically and by business line Management hallmarks to include an open, investor-friendly approach, discipline and proven execution effectiveness, strong risk management and a central focus on the customer We have strong base positions Slide 9
Our current position Naturally profitable businesses with historic RoE of 15%+ positives: Strong customer base with growth potential Robust deposit franchises All core Enduring brands & customer loyalty businesses are top ti er , Balanced portfolio operating at scale scalable, customer driven franchises: All Core businesses are challenged by recession negatives: All divisions need to re-tool to fix past management weaknesses Group must also re-tool to meet future environment Slide 10
Naturally profitable businesses Each division has historically strong performance 1 C:I Ratio LDR ~100% RoE >15% NIM >2.5% <50% or less � � UK Retail � � � UK Corporate � � � Wealth Global Banking & � � Markets Global Transaction � � � n/m Services � � Ulster Bank US Retail & � � � � Commercial � n/m RBS Insurance n/m Slide 11 1 Pre recession
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