RBS sees concerns about investment banking and consumer lending back

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The Royal Bank of Scotland CFO can be forgiven for underestimating The Terminator. Katie Murray had thought claims for poorly sold payment protection insurance could be as low as £ 600million in the third quarter. Arnold Schwarzenegger’s retaliation against his film character in ads encouraging people to make PPI claims has sparked £ 900million – the top end of RBS advice. But then, as the gargantuan actor once said: “I’ve always been underestimated”.

As a result, the bank reported a pre-tax loss of £ 8million in the third quarter, rather than the earnings of £ 720million expected by analysts. More worrying, however, for Ms Murray’s new boss Alison Rose is the underlying performance.

Excluding litigation and restructuring costs, a profit of £ 1 billion was 15% last quarter and 21% lower than consensus estimates, due to the weak performance of the NatWest Markets division and a sharp increase in impairment losses in personal banking services in the United Kingdom. None of these problems should be underestimated – because, to paraphrase Terminator, there is a risk “they will return”.

NatWest Markets, the investment banking division aimed at supporting corporate clients, saw income from its interest rate trading operations drop from £ 145million in the previous quarter to just £ 2million. This was attributed to “high hedging costs caused by reduced liquidity and wider bid-ask spreads, as the market experienced a sustained flattening of the curve.” However, as with Arnie, what seemed difficult to understand at first was actually simple: with no real US presence, all transactions were concentrated in pounds-euro, and all transactions were in one direction – this which meant that NatWest couldn’t cover it quickly or cheaply. Additionally, two-thirds of the business risk seemed unnecessary, as two-thirds of this division’s business is not directed at the corporate clients it is supposed to serve.

UK personal banking impairments doubled to £ 131million in the third quarter from a year ago. This is because credit card depreciation charges fell from 0.1% of loans in the previous three months to 5.5% – in part due to a return to zero percent of loans. credit cards, and part of the recognition of an additional charge for economic uncertainty and make some modeling adjustments. However, this was the first time the bank had made such large notional adjustments, after insisting that consumer credit quality was resilient – and, as with Terminators, what seems moot may soon turn out to be moot. reality.

So when Ms Rose takes on the role of managing director next week, her decisions must include: balancing the risk and growth of personal loans in the UK, and fixing, scaling or selling the capital-intensive NatWest markets. Both can impact his other big decision: how much excess capital can be returned in the form of special dividends or stock buybacks. Investors should not overestimate this figure.

The values ​​of the Rothschild family

It’s been over 200 years since the Rothschilds ran a small family business – and, even then, it wasn’t that small. It is therefore intriguing to discover that Rothschild & Co, the 3,500-person consulting firm from the banking dynasty and now present in more than 40 countries, decided to acquire Livingstone, a 43-year-old and 34-person service provider. . and debt advice to ‘predominantly British private and family businesses’.

Not only is Livingstone relatively small; its customers too. Rothschild describes them as part of the “lower end of the middle market,” and notes that they include individual entrepreneurs. This is not her first homecoming either: she has a consulting franchise in the same segment of the French market.

Why could this be the case, when its better-known mid- and large-cap advisory business has seen strong growth? Patrick Groarke, Partner of Livingstone, alludes to a reason in describing the private lower-mid-cap market as ‘alive’: Growth companies in the UK, like elsewhere, are increasingly private and thrive through private transactions, rather than joining public markets.

Rival Lazard’s UK operations manager recently said: “We are seeing more and more companies deciding to stay private or exit public procurement and go private. In August, Citigroup’s chief global equities strategist quantified the resulting “imbalance”: the available pool of US stocks has shrunk 2.5% since the start of last year; in the UK it is 3 percent lower. Rothschild & Co has not missed a trend since the beginning of the 19th century.

Relx avoids FT hex

Relief for news group Relx, which appears to have a share price inversely correlated with its coverage in the Financial Times. Despite recent interactions with FT reporters, Thursday’s online trading update has not inspired any copy, and its shares have recovered 4% of the ground lost after the painful news in July.

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