Saturday, January 24, 2009

The Rise and Fall of RBS

On Seeking Alpha
On Monday, RBS announced the biggest loss in British corporate history. It comprised £7 to £8 billion from trading ($10-$12 billion) plus a further £20 billion ($30 billion) write-down in goodwill following the acquisition of ABN AMRO. Total loss, therefore: $40 billion, and possibly more. Full results will be announced in February.

It is a dramatic comedown for an institution with a long and respectable history. Originally a very conservative Scottish bank, established in 1727, RBS pottered along for a few centuries without raising its head too far above the parapets. Then Fred Goodwin arrived in 1998 from National Australia Bank, where he had gained a reputation for being “Fred the Shred” for his singular and significant cost cutting focus during the bank’s acquisition of Clydesdale Bank.

By 2004, RBS commanded a global market value of $70 billion, more than JPMorgan Chase, Deutsche Bank, Barclays, and UBS. Just to put this in context, in 1999, the top 25 banks in the world based upon market capitalisation included ABN AMRO in 15th place and NatWest in 22nd, while RBS didn’t even make the Top 40. By 2004, RBS had moved up to become the 8th largest bank in the world.

The acquisitions and growth trail did not stop there, though, as Sir Fred’s ambitions continued unabated. First, there was a $1.6 billion investment in Bank of China in 2005 and then, in the most audacious move of all, a bidding war against Barclays, with Fortis and Banco Santander as RBS’s partners, to win ABN AMRO in a $101 billion all-cash offering in November 2007--right at the peak of the market. This was the biggest bank takeover in history and, at three times book value, very richly priced.

A new leadership is now in place to sort out the mess, with Stephen Hester at the helm. Mr. Hester came from Abbey, where he started his tenure with the bad news and some major mark-downs on the bank's position. He did the same Monday at RBS, with the news that a trading loss of over $40 billion is likely for 2008.

This, on the same day that the UK government announced a $300 billion secondary bank bailout plan, much of which is going to RBS as the government’s 57.8% preference share stake in the bank is converted to a 70% ordinary shares stake. This is being done in order to reduce the interest payments by around $1 billion a year, as the preference shares warrant a 12% payback versus 5% on the ordinary shares.

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