UK Banking Industry: Case of the Royal Bank of Scotland Plc (RBS

This report examined the performance of Royal Bank of Scotland Group plc and evaluated the competitive environment of the banking sector that it operates (RBS), and give the reasons for the current performance of the organisation, in order to do the recommendations for the better future actions who can be taken and conclusion.

RBS was selected because of the criteria for being an elders UK based company but also among the four biggest bank institution in the country banking industry. the three factors PET of the letters “PESTEL”, the Porters five forces, and SWOT analyses were used as Strategic management tools to examine the good health (performance) of Royal Bank of Scotland Plc. To get solid answers, we used different sources of information sources linked to the strategic management tools to measure the effective and efficiency of RBS plc health. on the basis of a study through credible sources of information online articles (Finance Times, Bloomberg, Guardian, etc.…) but also by, academic journals and books, company web site and database in the DMU library. 

This report found out that Royal Bank of Scotland is among the olders biggest financial institution in the UK and in the world according to finance Times journal. It employs 77 600 employees in the world (source: Bloomberg,2019) and a pproxilamatly 2500 workers in the UK. Its Operating net profit in 2018 were £ 1.6 bn up 2.13% from previous year.

The SWOT analysis give us insight to make some recommendations to the RBS in terms of market share and position but also some areas to improve such to invested in technology (Internet Banking) to improve the customers’ satisfaction and is competitive advantage in the sector.

On the other hand, the PET factors that we used to measure the external environment found that, the market situation recovered in 2016, with several key measures having experienced solid growth. Loans rose 2.9% on average to such low interest rate provide an incentive to borrow. the economic turmoil associated with Brexit. In terms of technology this is an opportunity for RBS plc for to increase customers’ satisfaction need to invest more in this rapid technology growth.

Introduction

The UK banking industry are experiencing an unprecedented wave of mergers and acquisitions (M&A) for the past two years. This movement, which began in the United States, took place United Kingdom banking crisis after the big banking crisis in 1998 within the sparked controversial debate on the subject that affects several components: financial, political, regulatory and social.

According to Carl-Johan Lindgren, Gillian Garcia and Matthew Saal, (2015), the fundamental role of the banking industry is to collect deposits from the public (especially deposits) and provide credit to businesses and households. In another word, is to direct the money of those who have financial capacity (temporarily too much money) to those who need it and offer sufficient guarantees

This report will analyses first the current performance of the Royal Bank of Scotland in exploring the recent annual reports of the organization (2017, 2018 to Q3 2019). In the second task will analyses is competitive environment in the banking sector and lastly give the reasons of the current performance. To achieve the result of those questions, we will use the annuals report of RBS (2017,2018 and the 3Q of 2019). The strategic tools will be used in order to make insight of the findings. To do so, we will focus on the Political, Economic and Technological factors of “PESTEL” that playing an important role in the banking industry in terms of external environment, the porters five forces to measure the competitive environment of the sector for RBS as the sector had several competitors and the Internal environment tools (SWOT) analysis to review the internal ability of the business.

Background of Royal Bank of Scotland Group PLC

The RBS group Plc is among the elders banking institution in the UK and Ireland where it operates as Ulster Bank, which offers a whole variety of services and products to companies, individuals, and commercial institutions. The Royal Bank of Scotland, according to the company’s website was established in 1727. its name was revealed to the royal charter which was granted when it was formed. The group continued to develop its activities worldwide after the appropriation (Acquisition) of Westminster Bank in 2000, with offices in Europe, the United States of America and Asia, according to Harry Wilson and Francine Lacqua of the Bloomberg journal, (Sept 2019). It is headquartered in Edinburgh, UK. It has around 77,900 employees.

According to the Bloomberg newspaper of September, 2019 by Harry Wilson and Francine Lacqua, the British government remains the main shareholder with a stake of around 62%.

The Current Performance of Royal Bank of Scotland

In order to be able to effectively to analyse the performance of a company is essentially concerned with measurement, Roberts et al (2005).

Banks' performance is generally measured by the return on assets (ROA), the return on equity (ROE) or the net margin on interest (NMI), and is a function of internal and external determinants. Internal determinants are also sometimes called microeconomic or inherent determinants of performance, while external determinants are variables that reflect the economic and legal environment in which the bank operates, Demirgüç-Kunt et al. (1999).

According to Marketline,2019, the United Kingdom banks industry grew by 10.7% in 2016 to reach a value of $10,255.8 billion. With a forecast in 20121 to have a value of $9,953.5 billion, a decrease of 2.9% since 2016.

The Royal Bank of Scotland Group plc, is financial services company, providing a wide range of products and services. The group operates in the Europe, The US of America and Asia through its two principal subsidiaries, the RBS and NatWest.

To measure the performance of the company, we will effectively base ourselves on the financial reports of two previous fiscal years. As we can see in the table below, despite the fact that the bank continues to be financed by the taxpayer through the government which is the main shareholder up to 62%. (Source: Bloomberg newspaper, Sept 2019)

2017 and 2018 financial report of the companies, shows us a better financial performance despite an uncertain economy because of Brexit and a very difficult environmental competition in the sector. See table 1 below.

£ 1.6 billion for the whole of 2018, up from £ 752 million in 2017. With revenue of million operating profit (FY 2017). This reveals the company's ability to improve is performance, as presented in the balance sheet and Income of Statement of the Company in the annual report 2018. (see appendix 1).

This is the second successive year of profit for the bank since it used public funds of around    £ 45 billion in 2008 as argued the chairman of the company according to the chief executive of the group. (Annual report 2018).

Ross McEwan, the RBS’s former Chief Executive, said, “2018 was a year of strong progress on our strategy - we settled our remaining major legacy issues, paid our first dividend in ten years and delivered another full year bottom line profit. However, while our financial performance is more assured, we know that a significant gap remains to achieving our ambition to be the best bank for customers. We are fully focused on closing this gap.”

The company recorded revenues of £ 2.2239 with a net operating profit of £ 1.6 billion in the fiscal year ending December 2018, an increase of 2.13.2% compared to fiscal 2017 up from £ 752 million of net profit.

As we know, one of the main objectives for a company is to maximise the shareholders’ wealth. so, paying the dividend to the shareholders for the first time in a decade showed that RBS continue to progress in building a stronger, safer bank that is capable of delivering improving returns.

Table 1: Performance analysis of RBS

Earnings per share 13.5p in 2018 to 6.3p in 2017

In spite of the payment of dividend to shareholders, RBS, who is the UK’s biggest lender to small businesses, try to maintain its targets but cautioned that the outlook “is likely to make income growth more challenging in the near term”. Its shares fell 3.8 per cent by mid-afternoon on Friday, to 240p.

try to maintain its targets, but warned that the outlook "should make revenue growth more difficult in the short term". Its shares fell 3.8% to 240p in October 2019.

According to Jason Napier, analyst at UBS, “the headline results probably look worse than the reality”. Net interest margin, the difference between what the bank pays for funds and what it earns from lending — was weighed down by accounting changes. RBS said margins in its core retail and commercial units were steady at 2.07 per cent.

The Competitive environment of RBS Bank Group Plc

According to Michael E Porter (1979), the Five Forces of Competitive Position Analysis is a simple framework for assessing and evaluating the competitive strength and position of a business organisation. This part will try to analyse the five factors and understand those factors that can affect or affecting profitability in UK banking industry and Royal Bank of Scotland.

1. The bargaining power of buyers / clients of the Royal Bank of Scotland is a reason for the buyers' lack of interest in closing their bank account despite the new incentives, on the other hand, an increasing number of banks and Fin Tech companies which offer services of identical quality. and at lower cost is perhaps the real reason for this departure. This lowers the costs of substitution between banks, and gives purchasing power to get service at extremely low costs. According to (McConnel 2017; Miligan 2017), integrating technology into financial management, customers and buyers opt for Fin Tech services to make payments, transactions and even save money easily in the savings accounts launched by companies such as Tesco and Sainsbury’s for instance.

2. The suppliers of the Royal Bank of Scotland have an indisputably meager bargaining power, a cause of the large number of suppliers on a low banking ratio in the consolidated and concentrated markets. What can be donated to the Royal Bank of Scotland, the capacity offered for goods and services at a lower cost with suppliers.

3. Competitive rivalry, Personal and retail banks in the UK in the sector is very fractioned, the largest banking structures are 4, namely: Lloyds, HSBC, Barclays and RBS which together control 77% of UK current accounts and around 80% of accounts banking for businesses. According to KPMG 2016, distinct from the oligopolistic competitive structure system. This situation is the result of mergers and banking weaknesses following the great financial crisis of 2008, that only a few new banks have continued to emerge and offer current accounts, for instance Virgin Money, Metro Bank (Dunkley 2017). This can be explaining by the Regulation in the banking sector is costly and a major obstacle for new entrants.

4. Threat of substitution, according to several sources, the continuous arrival of Financial Technology and new non-financial players entering the financial sector as Atom Bank’s successful business model has shown the way for many other FinTech like Apple with Apple pay, Google with Google wallet (Brown 2017). The Royal Bank of Scotland is facing an increasing threat of substitutes Financial Technology companies like its other competitors.

According to (Mintel 2018), Substitutes for personal and professional account services include cryptocurrencies such as Bitcoin.

5. Threat of new entry, Traditionally, the banking industry has high barriers to entry that have made the threat of entry low. Even now, new entrants face high barriers of entry including traditional barriers such as physical branches, experienced staff as well as existing burdensome regulation following the 2008 GFC. For example, acquiring e-money or bank licenses requires a series of time-consuming steps like pre-application, application, mobilization and beyond lifting, where overall higher standards are required for banks (Hipperson 2017). This discourages emerging of new Banks, which is why only a few new banks have been able to offer current accounts in the past five years, including Virgin Money, Metro Bank, and Marks and Spencer while existing banks like Norwich and Peterborough building society have exited the market due to burdensome costs (Dunkly 2017). Customer apathy to switching bank accounts despite new incentive regulations further creates barriers to entry for new challenger banks (Milligan 2017). However, government regulations like the new UK Open Banking could lower barriers of entry in the banking sector and open up competition enabling FinTech companies and other banks to compete with the major banks that are dominating the UK banking sector (William-Grut 2018).

Analyse PESTEL of UK Bank industry

PESTEL analysis is a strategic tools of management that helps companies to provide a list of potentially important issues influencing their strategies in analysing certain factors in terms of (Political, Economic, Social, Technological, Environment and Legal) external environment or macro environment to understand the major challenges that a company facing and position the business plan.

For our research, we will focus on the PET of the letters PESTEL factor, the Political, Economic and Technological factors.

The political context of RBS Group plc banking is very complex, as the bank operates in several countries and hence it must respond to the reality of each system concerning changing rules and regulations

According to (Chari, 2007), as we know the British government still the main support of the RBS and the bank continue to face important problems abroad. For instance, in Etats-Unis, the local government try to maintain the local banks. As a result, the Royal Bank of Scotland faces significant challenges in maintaining its overseas affiliates and the bank relies on continued government support

This is why it can be said that certain political aspects can, in principle, compromise the growth of banking on a global scale in terms of changing regulations and rules.

This is a key factor in the step of growth and evolution of the company. With the uncertainty of the Brexit, the industry is considered to be vulnerable to the Brexit ruling, as large banking groups may seek to move their operations to another EU country in order to retain access in the single market but also government policies and taxation changes.

In terms of Economic factors are particularly important in this regard for the growth and development of the Royal Bank of Scotland on all issues. Indeed, the growth of the bank was maintained due to a violent expansion and the entry into new markets. Today, the Royal Bank of Scotland is trying to strengthen its slowed expansion after a slowdown due to financial problems and the economic recession of 2008 which saw government relief through the taxpayers' fund. The banking sector is facing a deep crisis. Therefore, the Royal Bank of Scotland must continue to optimize its performance in order to get out of government support and renew its growth in the near future.

As Profitability hampered by law interest rate environment, Thus, its growth depends on macroeconomic factors such as fluctuations in exchange rates and the often unpredictable stock market, whether here or elsewhere in the world.

The RBS Group like the rest of the banking groups, had to comply with the digital transfer and put technology at the heart of its actions. RBS group, set up the online banking services to individuals’ customers but still have a huge problem with the technology. for instance, recently it was hit by second IT glitch, and Customers expressed frustration after banks’ websites go down, (The Guardian, August 2019). To improve this, the new Chief Executive has promised to put at the heart of its actions digital development and planned to invest million pounds (for 2020). Thus to meet the regulatory requirement force of bank to invest in IT infrastructure.

The impact of the technology on the costs that most companies in the industry are subject to have the potential to increase or reduce the resulting profits greatly. If these profits are great in number, they may be reinvested into the research and development department, where future technological innovations would further raise the level of profits, and so on, ensuring sustainable profits over a long period of time.

The Reasons of current performance

To give reasons for the performance of Royal Bank of Scotland, the internal environmental tools (SWOT) will be apply to measure the capacity of the RBS in the banking sector, therefore helps to formulate recommendations.

SWOT analysis help to determine the strategic alternatives available to businesses by comparing strengths, weaknesses, opportunities and threats.

Strengths

• During the year 2016, RBS sought to mitigate where possible the impact of many of the macro challenges and threats analysed in PESTLE (figure 1) such as Brexit, civil litigations, fines and government regulatory pressure while also benefiting from the existing opportunities such as a reduced balance sheet, and growth in mortgages.
• Diverse business profile.
• High Dow Jones Sustainability Index.
• RBS is largest commercial bank in the UK.

Weaknesses

• RBS has not been profitable since 2007 and this continued in 2016 with the company making an attributable loss of £7billion.
• Material legacy conduct issues are still holding RBS back especially in relation to various litigations regarding the mis-selling of toxic mortgage bonds in the run-up to the 2008 financial crisis. RBS also still needs to resolve European Commission State Aid commitments including the need to sell off Williams & Glyn, which has so far proven extremely complex and has actually held back the upgrade and enhancement of a new RBS technological infrastructure which needs to be modernised and be cyber resilient.
• Divesture of Williams & Glyn has proved to be time consuming and extremely complex.
• RBS still has legacy RWAs.

Opportunities

• The strategic divesture of its shareholding in Citizens in the US as well as ending active operations in more than 25 countries as part of the continued restructuring to ringfence its UK operations, will improve core return and eliminate drag from non-core, further progressing the resolution of pre-crisis conduct issues (Annual Report 2016).
• Digital innovation a future avenue for growth and improving customer service experience.
• Growth in new mortgage lending market share as currently, demand for housing in many parts of the UK outstrips supply (Annual Report 2016, p.33).

Threats

• Brexit uncertainty is bad for many UK businesses including RBS. Management have already come up with contingency plans to establish an enhanced presence inside the EU to handle RBS EU activities within the borders of Europe should this be required as a result of the Brexit negotiations (Financial Times 2017).
• Regulatory pressure including new capital requirements.
• Introduction of a new 8 percent surcharge on bank profits in January 2016 by UK government.
• Legal penalties by the US Department of Justice (DOJ) still pending over residential mortgage-backed securities – costs one US agency has estimated could take RBS total outlay to $13bn in legal costs (Arnold and Dunkley 2016).

Recommendations ([Provide brief recommendations on 1. The strategic decisions that need to be made for the organisation to succeed 2. The areas for innovation that should be considered and 3. The organisational culture required and Future growth approximately 400 words

Conclusions

RBS continu à connaitre de moment difficiles depuis disons 2008 mais cette situation a connu un revirement suite à l’appui du gouvernement à renflouer ses comptes. Malgré tout cela, RBS continu à connaitre un environnement politique très difficile, caractérisé par des restructurations en raison des nouvelles règles de fonds propres réglementaires de l'UE, du Brexit, de l'introduction d'une nouvelle surtaxe de 8% sur les bénéfices bancaires ainsi d’une mauvaise gouvernance.

Malgré de problèmes judiciaires et enquêtes hypothécaires s'élevant à plus de 4,5 milliards de dollars (3,5 milliards de livres sterling) à la Federal Housing Finance Agency (FHFA) des États-Unis en frais de contentieux et en règlement de ventes abusives de produits toxiques.

Elle continue son travail et sera finalement rentable en 2018 après plus d'une décennie de pertes. Sa sortie de 26 pays et la cession de nombreuses filiales ont amélioré le bilan des banques, ce qui la rend plus petite, mieux capitalisée et moins endettée, donc bien préparée à se concentrer sur son cœur de marché britannique.

List of References

• Dunkley, Emma (2017) “UK challenger banks shy away from current accounts market” Financial Times [Online] at https://www.ft.com/content/ca1c26fa-81a6-11e7-94e2-c5b903247afd KPMG (2016) “2016 Banking Sector Briefing” [Online] at https://home.kpmg.com/content/dam/kpmg/pdf/2016/02/banking-the-customer-experience-dividend.pd