Ross McEwan has a lot to do at RBS

Ross McEwan may work in the same oversized office that used to be occupied by Fred Goodwin, but the bank he is running is already markedly different from the global empire that the disgraced Scottish banker built up before it collapsed into a £45bn taxpayer bailout in 2008.

McEwan's predecessor Stephen Hester, who left Royal Bank of Scotland at the end of September, had already cut the bank's assets from £2.2 trillion to £1.1tn (just less than the UK's national income) and cut at least 33,000 jobs to take the size of its workforce down to 120,000.

Changes put in train by Hester will take another 25,000 positions out of the business in the coming years – when the US arm Citizens is floated, the non-core division is wound down and 314 high street branches are rebranded as Williams & Glyn's before a stock market flotation.

On Thursday, McEwan – a New Zealander who has admitted he feels more comfortable with people than with figures – will reveal his strategy for the 81%-taxpayer-owned bank. It will be his attempt to make his own mark on the bank and, eventually,get it back into private ownership.

Shortly after he took charge, he gave some clues to his goals: a focus on costs, but with a dramatic improvement in the treatment of customers after the payment protection insurance mis-selling scandal, which has cost the banking industry at least £20bn.

As he sets out his pledge to turn RBS into "the best bank in the UK" – rather than the biggest in the world, as it was briefly under Goodwin – that pledge to focus on costs seems likely to involve cutting more jobs and pulling out of businesses that eat up capital and make continued losses.

His focus is on the cost-income ratio, which stands at 65% – this, he says, means that out of every pound it made, the bank only had 35p left to spend on the business. He is aiming for a ratio in the mid-50s, which has sounded alarm bells for union officials worried about their members' jobs.

As McEwan prepares to set out his stall, some decisions have already been made: in particular the plan for a new £38bn non-core division. This followed a review, commissioned by chancellor George Osborne, which stepped back from recommending the bank be broken up into "good" and "bad" banks. Creating that non-core division is costing £4.5bn, and helping drive the bank to an expected £8bn loss.

McEwan will announce the size of the loss on 27 February along with his strategy review. Here are six key challenges he faces:

Get the high street bank back into shape

McEwan used to run the retail bank before his promotion, and has said he will spend "whatever it takes" to get the bank's IT systems fit for purpose after the botched upgrade in June 2012 locked customers of RBS and NatWest out of their accounts for days, and left Ulster Bank customers without access for as long as a month. He has already told colleagues of his frustration with the IT systems and the use of fax machines, and has earmarked around £700m for technical investment.

More than 1,000 roles are already being axed as he attempts to cut duplication between a business that is run from of both Edinburgh and London. But more job cuts seem likely. Even before cost-saving plans, RBS's branch network is set to shrink, probably towards the end of the year, when the branches that the EU has told the bank it must sell off under the terms of the 2008 bailout will be spun out under the Williams & Glyn's brand.

An office on Bankside, central London, leased in 2007 to house RBS's retail banking operations, is to be sublet, and other savings on properties may be considered.

Decide what to do with Ulster Bank

Some £9bn of Ulster Bank loans are to be put into the new non-core division, but last November McEwan said this whole operation would be part of his strategic overhaul. "We need to ensure that we have a viable and sustainable business model for Ulster Bank as part of this review," he said. "It's an important business for the whole island of Ireland. We understand the need to get this right."

Improve treatment of small business customers

A scathing attack on the bank's treatment of small business customers by Lawrence Tomlinson, businessman and adviser to Vince Cable, has already forced RBS to rethink the way it lends to businesses and supports them afterwards. McEwan is hiring at least 300 small business specialists to work in branches; Chris Sullivan, the long-serving RBS executive who currently oversees the corporate division, is getting ready to step aside.

Deal with investment bankers

RBS's investment banking operation employed 24,000 people after the now infamous 2007 takeover of ABN Amro, but this workforce has fallen to 10,000 people who have been told to focus on helping corporate customers, rather than dabbling in exotic financial instruments. McEwan has said he has already "encouraged restructuring" of the investment banking arm. However, it still operates a vast trading floor in Connecticut – once known as Greenwich NatWest – and this "securities division", where 1,000 of RBS's highest-paid bankers are employed, is thought to be vulnerable.

The paring back of the investment operation has taken its toll: in 2008 it generated 60% of the business; now it is closer to 20%. Ian Gordon, analyst at Investec, foresees further falls. "We expect profit before tax in the markets division to fall from £1.5bn in 2012, [26% of "core" profit before tax], to just £0.6bn in 2013," Gordon said.

Justify paying half a billion pounds in bonuses

The City expects RBS to report £8bn of losses on Thursday, as it takes account of the cost of setting up the non-core division and sets aside £3bn for "conduct-related matters" – meaning fines and lawsuits – relating to mistakes from the past. Even so, a bonus pool of around £500m is expected to be earmarked for employees, although McEwan and his nine-strong top management team will not be taking any of it. Last year the pot totalled £800m, but McEwan can expect tough questions about £500m, given the scale of the bank's losses.

Make a profit and pay back the taxpayer

RBS is on course to have made losses of £40bn since its 2008 bailout, almost as much again as the taxpayer ploughed in at the time of the crash, and the chances of a share sale before the 2015 election seem small. Analysts at Morgan Stanley say: "There are still major milestones ahead. Exiting government involvement appears distant to us – as does the prospect of a dividend".

Analysts at UBS have warned that the share price is unlikely to get back to 500p – the average price paid for the 81% government stake – this decade. Since the UK government originally invested in RBS, its sustainable earnings power has halved, the analysts say. "A number of disposals have been made or are planned which will not generate cash that can be returned to shareholders. The same is true for the shrinkage of the markets business, which we would not be surprised to see extended."

The shares closed at 362p on Friday – a loss of almost £13bn on the break-even price. The UBS analysts said that a level of 407p – the price the shares are officially accounted for – could be achieved by the middle of the next parliament.

Powered by article was written by Jill Treanor, for The Observer on Sunday 23rd February 2014 00.05 Europe/London © Guardian News and Media Limited 2010


image: © Elliott Brown

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