Not so long ago, the Royal Bank of Scotland (NYSE:RBS) was one of the world’s largest banks. As of Monday, though, it is a former bank. The CEO who built RBS from essentially nothing, Sir Fred Goodwin, is shamed, his bank is in disarray. UK Prime Minister Gordon Brown accuses the bank’s former management of being “irresponsible.” Some 70% of the bank is now government owned.
What happened and why?
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.
Goodwin was determined to change RBS in a similar fashion, and change is what he created.
He was hugely ambitious. When Goodwin concocted the idea of combining England-based NatWest with Scotland-based RBS, for instance, he managed to convince NatWest shareholders to accept a massive, $32 billion, buyout in 2000. This deal was previously unimaginable: NatWest was twice the size of RBS. Still, the deal was consummated in March, 2002. It made RBS the biggest bank in Britain, and one of the biggest banks in the world. In keeping with his reputation, Sir Fred soon had his axe out and cut 18,000 jobs and over $2 billion in costs in the merger, when only $1.4 billion had been promised.
This success led to more, with a £1.1 billion ($1.6 billion) acquisition of Churchill Insurance in the UK in 2003 and, in May 2004, a $10.5 billion acquisition of Ohio-based Charter One Financial. This acquisition added to the already-acquired Citizens Bank (in 1988) and resulted in a $128 billion increase in RBS's U.S. assets, making RBS the largest European-based bank in the United States.
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. Skeptics abounded even as the deal was announced. Furthermore, RBS’s main object of interest in ABN AMRO was the bank’s LaSalle unit in Chicago. When ABN sold LaSalle to Bank of America in a defensive move, RBS might have reasonably exited the scene. But Sir Fred’s ambitions and ego were so great that he railroaded the deal through anyway, with his partners.
All in all, the bank has been through a major rollercoaster under the leadership of an egotistical, even megalomaniacal CEO who built the bank up from a share price of 442p ($7) when he took charge in 2000 to a peak of 607p per share ($9) back in 2007.
The share price Monday was just 11 pence (16 cents), down a third on the day. A $5 investment in RBS in December 2007 would therefore be worth 11 cents today, as the shares were trading at 495p on 12th December 2007.
Compare that with Citigroup, who would still be worth around 60 cents on a $5 investment, or HSBC, which would be worth $2.60 and it puts RBS’s downfall into context.
Effectively the bank has fallen from being the market’s star to being a dog, and Sir Fred has gone from Hero to Zero, with the UK Prime Minister Gordon Brown commenting that it’s up to the UK regulator, the Financial Services Authority, to consider whether any charges should be made against him.
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.
Whatever your view, the UK government took up almost 58% of the last RBS rights issue for £15 billion ($23 billion) last November, and has already lost £12 billion ($18 billion) on that deal. Now, as the majority shareholder in the bank, the government can only hope that it can unravel the mess of RBS’s acquisitions, devolve as much as possible, get some of the cash back, and refocus the bank on being a small, domestic, UK bank.
That’s the best place for it.