Showing posts with label Citizens Bank. Show all posts
Showing posts with label Citizens Bank. Show all posts

Friday, 16 May 2014

RBS forced to sell Citizens ending the most successful UK retail banking foray into US market

British businesses don’t have a great track record in breaking into the US retail market. You only have to look at the disastrous foray that the Marks & Spencer acquisition of Brooks Brothers was, Tesco’s humiliating and expensive attempt with the Fresh & Easy brand and, most recently, the failure of Yo Sushi! to realise how difficult it is for firms with strong brands in their domestic markets to make it across the pond.

The retail banking track record is no better with Barclays, Lloyds and Natwest all quitting the US in the late 1980s and 1990s. Losses from the acquisition of Crocker drove Midland Bank into the arms of HSBC. Even HSBC has not been immune to the problem with the disastrous acquisition of subprime Household continuing to hurt the bank to this day.

It is quite ironic then that RBSG is being forced to exit the one reasonably successful move into retail and commercial banking that British banks have made in the US. Whilst Fred Goodwin, the former CEO of RBSG, has been criticised for much of the way that he ran the global banking group (particularly paying over the odds for ABN Amro just as the wholesale markets were closing down) his strategy for building a presence in the US retail and commercial banking sector should be heralded as one his smarter moves.

Rather than trying to take on the large US retail banks where they were, at that time, competing aggressively with each other in New York, California, Texas and Florida, Goodwin decided to build his beachhead in the Mid-Atlantic by the acquisition of Citizens Financial Group. A series of small but strategically significant acquisitions followed that expanded it into New England and the Midwest. Citizens is now the 15th largest commercial banking organisation in the US. Whilst there have been challenges including writedowns following the acquisition of Charter One and recent issues with the way that capital is planned, overall Citizens is a highly capitalised and profitable bank. Yes its capital is under deployed but that is addressable. Indeed its reputation with its customers is far better than RBS’ in its own domestic market.

It is a great shame then for RBSG that due to having to take state intervention and becoming largely nationalised, primarily due to the acquisition of ABN Amro and the disastrous business in Ireland, that RBSG is being forced by the EU to dispose of its ownership of Citizens by the end of 2016.

As the first step of moving towards this in January 2014 Citizens sold off 103 branches in the Chicago area to US Bancorp.

 It has been announced that the next step will be to float or sell 20-25% of its share of Citizens. A flotation is more likely as there have been few signs of interest from potential buyers. However for Canadian, Japanese or Spanish banks that want to significantly grow their presence particularly in the Midwest and given that it is a forced sale it could be an interesting opportunity.

The flotation will help to rebuild its balance sheet, but the sale is what is really needed as that could release more than $3bn of capital, which would help RBSG reduce the government holding in the bank.

This is all a sad ending to what could have been had RBSG scaled back its ambition to be global investment bank.

As a footnote, British banks should not give up on being able to build a presence in the US retail and commercial banking market. RBSG has shown that it can be done. Barclays is having success with its Barclaycard US operation building scale to take on the other cards providers, however this is a monoline not a full service retail banking offering.

The British banks can also look to the Spanish banks, Santander and BBVA which with respectively the acquisition of Sovereign Bank and Compass Bank, are demonstrating that it is possible for Europeans banks to build a presence in the US retail banking market. It takes time, patience and recognition that whilst both the US and European markets have the words ‘retail banking’ in their names that they are quite different.

Thursday, 24 April 2014

The challenges facing the next RBS CIO

With the news that Mike Errington, CIO of RBSG, is retiring the bank will be looking for a replacement. The new CIO will have an overflowing inbox, so for those considering taking on the role what are some of the challenges that he or she will have to face?

The immediate on-going work is to ensure the stability of the existing systems. Having had a number of serious, customer-impacting outages over the last few years (including a problem with Ulster Bank ATMs on the day this was written), the work of applying patches to and building resilience into both hardware and software needs to continue. RBS is not the only bank that in earlier times avoided doing maintenance as a way of saving costs and subsequently is feeling the impact of doing that in terms of reliability of systems.

The second tactical exercise is the simplification of the IT infrastructure. However this is far easier said than done as the IT systems have evolved over many decades, creating great complexity and the number of people who understand the older systems and how they interrelate is rapidly declining both as the result of retirement and cost cutting within the bank. Simplification is about retiring and rationalising systems and infrastructure. Given the complexity that exists this is alike disarming a booby-trapped Second World War bomb requiring both high levels of skills and nerves of steel.

Both of these steps are akin to re-arranging the deckchairs on the Titanic, given the ages of the systems. There is no doubt that there has been significant underinvestment in IT since way before the RBS/Natwest integration. Whoever is the new CIO they should use the opportunity of as part of their taking the role to negotiate a commitment to a wholesale replacement of the core retail banking system as the likes of CBA (Commonwealth Bank of Australia), Nationwide Building Society and Deutsche Bank have carried out. However this would involve spending measured in the low to mid billions of pounds and a programme taking 3-5 years to execute. This is where making such an essential change becomes particularly difficult specifically for RBS as RBS is not just any bank, it is a state-owned bank. Such is the political pressure to see the bank returned profitably to the private sector and within the first couple of years of the next government i.e. almost certainly by the end of 2018, that it is highly unlikely that the funding for such a major investment programme will get approval from the key shareholder. However that is what both the CIO and the CEO should be looking for if RBS is to once again become a truly competitive UK bank.

There are however other major transformation programmes that the new CIO will have to pick up, drive and deliver.

Having negotiated an extension of the deadline to the end of 2016 for the disposal of the 308 branches that RBS was forced by the EU to sell as a result of receiving state aid, creating a separate clone of the RBS systems for the new Williams & Glyn’s bank to run on is another top priority for the new CIO. This is not dissimilar to the exercise that Lloyds Banking Group had to perform to create the platform for TSB to run on. However the Lloyds Banking Group platforms were in a far better state than the RBS systems benefitting from coming on the back of creating a single set of systems for the Lloyds TSB/HBoS merger. Even having that advantage for Lloyds Banking Group creating the separate TSB platform was not simple or easy with the eventual cost being in the order of £2bn. Delivering the William and Glyn’s separation to the 2016 deadline will be a major achievement.

This is not the only separation programme that the CIO will have to oversee. The IPO of the Citizens business in the US in Q4 2014 and the complete disposal by the end of 2016 will also need to be executed. This will entail the disengaging of Citizens from the Group systems.

In addition there is the question of what to do with Ulster Bank. The preferred option is to dispose of it by selling it to one of the challenger Irish banks e.g. Permanent TSB, Danske Bank. If that is to go ahead then the new CIO will have to look at the separation of Ulster Bank from the Group systems and supporting the clone until it is integrated into the buyers' systems.

One of the core strategies of RBSG is to scale back the investment bank, reducing costs to be aligned with the smaller bank and to return the bank to be more focused on the UK and supporting UK businesses. This will inevitably require changes to the investment banking platforms as businesses are closed or sold off. To achieve the reduction in costs and the required flexibility as volume drops will almost inevitably mean looking at further outsourcing of platforms and operations to third parties.

On top of the RBSG specific initiatives the new CIO will also face the plethora of transformation programmes and projects that will need to be implemented as a result of regulatory changes. One of the core ones will be the implementation of ring-fencing once that is fully defined. This will mean a significant change in the governance of RBSG and there is a question as to whether the role of Group CIO can persist under the new rules, requiring in a significant restructuring of Group Operations.

All of this will need to be delivered whilst digital, mobile and the use of data analytics for both competitive advantage and risk management continue to move at pace in an increasingly competitive banking market.

The new RBS CIO will need to face up to this hugely challenging environment all within the constraints of  a bank operating very much in the public spotlight, with the need to rebuild trust and the financial constraints imposed by  having the government as the largest shareholder. Only the bravest should apply.