Thursday 27 February 2014 was the day Royal Bank of Scotland formally pulled the plug on its Markets and International Banking business – the mighty investment bank that, as Global Banking and Markets, employed the thick end of 19,000 people before the global financial crisis struck.
The strategic review announced yesterday confirms what we already knew: in an effort to stop losing money and stabilise, it is becoming a smaller bank, abandoning global investment banking in order to concentrate on the UK and Western Europe. Thousands of jobs will be cut. Chief executive Ross McEwan has spoken of the need to improve the bank’s reputation, which includes being seen to support UK business and boost the economy. Supporting infrastructure ought to be a part of that.
But infrastructure banking is investment banking; and under its new structure RBS will no longer have an investment bank: what’s left of that business will be folded into the “corporate and institutional” bank.
So will it really be able to have a meaningful infrastructure financing business? Or will its infrastructure bankers be forced to do non-infra deals owing to staff cuts, get fed up and jump ship to HSBC or a Japanese bank that’s got more money and hires more staff than it knows what to do with (you know who you are)?
On balance, and having taken some well-informed advice, I would say the former – but don’t expect that business to be much bigger than what it is now – which is strictly limited.
RBS has been shedding thousands of investment bankers over the past four years – but many of those are from the bank’s overseas businesses. Certain business lines relevant to infrastructure have been abandoned in that time, specifically mergers and acquisitions advisory (no more advising on buying Edinburgh or Stansted Airport) and international project finance (no more financing airports in Istanbul or methanol plants in Oman).
A senior banker with good knowledge of the situation tells me it’s unlikely that RBS’ remaining infrastructure team would be asked to do non-infrastructure deals just because the bank has shrunk; and it’s worth pointing out that a lot of RBS’ job losses are going to come from back office functions such as IT, as the bank seeks to drastically simplify its systems.
Where the bank has a strong track record is in writing loans and arranging bonds on behalf of infrastructure businesses, such as Manchester Airports Group (a highly successful £450 million bond issue was closed last month, and RBS also joined a dozen other banks in lending £810 million in loans to the group). RBS’ strategy presentation claims that the bank enjoys a high reputation among its clients; relationships are key in investment banking.
This kind of lending to an established piece or set of pieces of infrastructure can support ongoing investment – but not the creation of entirely new infrastructure, what they call greenfield projects. New standalone projects developed by the private sector, from motorways to power stations, are usually financed using the project finance model, where debt and equity is raised against the project’s future earnings instead of against a corporate balance sheet. Debt tends to be long-term, over 10 years, to match the long-dated life and revenue stream of the asset.
And here RBS seems to be struggling. It hasn’t signed any project finance deals in the UK since the autumn of 2012, and no really long-term project finance since doing about £55 million of 25-year loans for the Norfolk waste processing PFI project in February 2012. How long the bank can go is a key measure of its strength, as is how much it can lend. Right now it isn’t doing well on either, even allowing for the lack of project finance opportunities in the UK right now.
To be fair, RBS has tried – it announced last year it was setting up a guarantee scheme to allow institutional investors, such as pension funds and insurers, to buy project bonds to finance new infrastructure projects. RBS, with its expertise of infrastructure, would take the risk that the project would be built on time (in return for a fee), leaving the investor to take the risk only on the completed asset. This (if it works, which isn’t straightforward) overcomes the agonising problem that institutional investors have with construction risk I’ve written about before. Trouble is, RBS hasn’t actually got round to using the guarantee product yet. It seems to have tried to use it for the Priority School Building Programme, but its bid was rejected in a competitive tender earlier this year.
I don’t see evidence that this situation will get much better anytime soon. As mentioned, RBS has to stabilise itself by selling off assets, and that strongly discourages increasing the amount of long-term debt on its balance sheet, particularly under the incoming Basel III rules. As such, it isn’t about to start throwing billions at UK infrastructure, especially not at project finance. Japanese banks with their stronger balance sheets have the edge here, to say nothing of bond investors who, for one reason or another, haven’t fallen for the idea of an RBS guarantee yet.
On balance I think it’s undeniable that RBS remains competitive in short-term finance for infrastructure – the five-year loans and bonds that airport X or water company Y looks for on a rolling basis. In long-dated debt, I think it will struggle.