RBS contraction could kickstart trend

ROYAL Bank of Scotland’s decision to cut jobs at its investment bank, RBS Securities, by more than a quarter may kickstart a wider shake-up among its rivals.

Plans by RBS to shed 3,500 staff by closing its equities, mergers advisory and equity capital markets businesses is part of a trend among similar sized banks. Hit by a fee drought and costly new regulations, UniCredit shut part of its equities unit. Nomura Holdings and UBS are also pulling back.

Other banks with securities arms may soon follow suit due to the same reasons, say analysts.

“Middle-ranking banks are being squeezed as volumes have collapsed,” said Christopher Wheeler, analyst at Mediobanca in London. “The banks that are neither betwixt nor between can’t afford the cost base they’re running.”

Europe’s investment banking fee pool, which comprises payments to banks for M&A advice, loans and underwriting debt and equity sales, posted the worst quarter since 2004 in the three months to December, said New York-based research firm Freeman & Co.

Investment banking fees in Europe fell to €3.3 billion in the fourth quarter of 2011 from €3.7bn in the previous quarter and €5.7bn in the second quarter. Fees hit a record €8.7bn in the second quarter of 2007, the data shows.

Competition has driven the average fee for an IPO in Europe to a record low of 1.87%, according to data compiled by Bloomberg. This is down from 2.5% in 2008 and 2.2% in 2007, a record year for IPOs.

Earnings in the 25 banks in Bloomberg’s European bank index are forecast to fall 40% from 2010 on average, driven by profit warnings among British banks UBS and Erste Group Bank, according to a survey of analysts by Bloomberg.

Profit at RBS’s investment bank fell 85% in the third quarter to £80 million (€97m), from £549m a year earlier.

Nomura posted a 46.1bn yen (€471m) loss for the three months ended September 30, the first since the quarter ended March 2009, driven by declines in trading and investment banking income. Pretax losses from overseas operations hit 52.4bn yen, the most in six quarters.

RBS is reversing a decade of expansion, closing units and cutting employees at the securities unit, led by John Hourican, by 29% to 13,500 by 2015. The Edinburgh bank will focus on fixed income, foreign exchange and transaction banking.

“The tough economic outlook and regulatory changes will impede our progress — as it will for all banks,” RBS chief executive Stephen Hester, 51, told employees. “I expect other banks to follow our lead in their own differing ways.”