How will the Moody’s downgrade affect your strategy given your strategic reliance on being a strong counterparty?
We are a strong counterparty. The group disagrees with Moody’s ratings change, which we feel is backward-looking and does not give adequate credit for the substantial improvements we have made to our balance sheet, funding and risk profile. Nonetheless, the group believes the impacts of this downgrade are manageable, bearing in mind its £153 billion [$240 million] liquidity portfolio. The amount of collateral that may have to be posted following this one-notch downgrade is estimated to be £9 billion as of May 31, 2012. The group continues to maintain a solid liquidity and funding position, and RBS has completed its planned wholesale funding requirements for 2012.
Despite these balance sheet concerns are you happy with the flow business coming through the bank from the market?
Mostly. Flow business is something we all want and we are careful to manage. But the market structure is changing. Keeping flow at a level where you can monetize bid offer is hard work. Across the market, flow businesses are down a bit. Foreign exchange volumes have been impacted and interest rate derivative volumes in the corporate space are hard to find because rates are so low and expectations of them rising any time soon are relatively modest. So while the flow business is strong, it is something we are not taking for granted. One of the things we must do is monetize more the connectivity revenues that exist across our businesses. We have got a huge cash and trade business, we have 35% of the UK market and many leading exporting companies bank with us but there is always room for improvement.
How can you dispel the notion that after the sale of the cash equity and M&A business in Asia that you are de-emphasising Asia?
Cash equities and M&A were unprofitable businesses and we made the very difficult, but right, decision to exit those businesses. We have decided to focus on what we are very good at: bonds, loans and all forms of financing; the risk management around those, such as interest rate derivatives and foreign exchange; and cash and trade. When I have discussed our new focus with clients their response has been mostly positive.
When rolling out this strategy in Asia, is the challenge different from the rest of the world? Is it more capital intensive and risky?
The region has historically used a lot of capital and not necessarily generated the level of returns due to competition with local banks. I think we can do a lot more. We have a very significant network in Asia and we need to monetise that network through the flows that go through it. I think we need to do more with our 11-country network. This is about return on equity and creating a return which is above the cost of capital for our shareholders. If you do that you’re valuable; if you don’t, you’re not. It is simple. The other thing to remember about our Asian business is that it doesn’t exist on its own. It is part of a network. We serve our Asian customers on an international basis.
Which major divestitures are still to do?
As a group we have Direct Line well heralded as a potential disposal and that process is very public. Project Rainbow — what we call the sale of UK branches — is underway. And there is the conclusion of the sale of our business in India to HSBC. It has all been announced.
How about growth?
You cannot shrink yourself to greatness. You need to decide what you are and package around that the right level of resource for your customers. That is what we have been trying to do. We are very focused on being a macro fixed income business, generating good returns from a customer-centric business. And we want to drive connectivity revenues around the group in the same way, so linking up with the UK corporate bank or the wealth business or Citizens is important. This business is the product engine sitting at the heart of the group. There are lots of challenges on a range of fronts such as regulatory and economic growth.
Coming back to those headwinds — capital, macroeconomics, politics — what is your number one challenge?
Retaining the hearts and minds of our people is my uppermost challenge, managerially. We are in an industry that is changing shape dramatically, and the industry and our company is the subject of much criticism. We need to encourage people to stay committed to our company and the industry as a whole. This sits squarely alongside the challenge of re-shaping a business to accommodate the massive changes to capital caused by re-regulation.
How are you doing that? How do you keep bankers happy these days?
You need to pay people an appropriate amount for what they do. That is a given. For the last three years pay has been coming down across the industry and much of that has to do with the fact that if you double the level of capital in an industry you will halve its value. At RBS, we continue to try and ensure that we pay our people a competitive level of remuneration and that we create an environment where people truly can make a difference. This is not an easy task.
So has the fun gone out of banking?
Banking is hard work but rewarding, and the challenges we have been facing certainly keep things interesting. The industry has been a lot less fun over the past three years but this is not surprising given the serious challenges facing our industry.
What do you see when you look at the future of finance?
Well, reinventing banking and what we offer our customers and our investors is the challenge that brings most people to work every day. We are trying to ensure we create a business which adds value to our customers, creates careers for our people and generates a return on equity that is above the cost of capital. I think the next three years could be harder than the last three years. Harder because we have already had the cardiac arrest and now need to rebuild. We have been through a massive restructuring: we have taken the balance sheet down from £864 billion to £360 billion; we have taken 6,000 people out of the wholesale business; we have shrunk the network down from 52 to 38 countries; we said we would deliver a return on equity in the global banking and markets business of 15% and we did 18%; we made £10.7 billion pounds of profit. We have done everything we said we were going to do and yet the share price is low and our people are tired. It is quite hard work. All you can do is keep going.
In a centrally cleared, price-transparent, multi-asset collateral world, how do you organise yourself to compete to win?
Banking will be very different from how it was five years ago. We need to find our place in this new order.
How will these fundamentals change? You will still take money from depositors and lend it out?
In international banking you are taking the deposits of ocean-going companies and collectively lending them back to them. In the retail space it is the same process. In market making you create the conditions for flow. You want the velocity of your balance sheet to be high. The fundamentals won’t be different, but the margins you can extract and the pace at which you will do it will all change. The structure of the marketplace will evolve. The speed of light is a limiting factor in our business.