The Royal Bank of Scotland (RBS), the UK’s second largest banking group, in line with other players in the market, saw its profits rise again this year. It reported a pre-tax profit of £9.2 billion, 16 per cent up on figures last year.

RBS, which also owns Nat West, Churchill Insurance, Direct Line and Lombard, reported that much of its gains had come from the investment and corporate banking division, and that 42 per cent of its operating profit came from outside the UK. The UK retail division saw profits rise only two per cent to £2.29bn.
Sir Fred Goodwin, group CEO, said the results demonstrated the success of the organisation’s diversification of income across the entire group. RBS has become adept at merging and blending organisations, and gaining the right mix of incomes is obviously becoming more important in the global economy.
RBS has been focused on growth outside the UK for a number of years, and spent £5.5bn on the acquisition of Charter One in the US in 2004, and £900 million on a five per cent stake in the Bank of China in 2005.
Many analysts and shareholders thought Goodwin, who was also at the helm of RBS for the hugely successful acquisition of Nat West, had gone too far in his overseas investment strategy, and RBS’ share price reflected this. But this year, after the increase in profits, the bank increased its dividend by 25 per cent and Goodwin has become a shareholder hero again. Getting into bed with the Bank of China could be a shrewd move and RBS’ joint venture has seen more than 1.2m credit cards issued there already. But there are still some concerns about the bad debt charges of the firm, which rose 10 per cent to £1.88m. In the group’s retail banking section, which is focused on the UK, bad debt charges rose 15 per cent to £1.3bn. In fact many of the large banks believe that the outlook for bad debts in the UK is improving, and share prices are beginning to reflect that.

In technology terms group IT appears to be doing a solid job and, of course, has become an expert at integrating acquisitions into its core systems. But it is unwilling to talk about its IT operations in any detail. In the CEO’s review Goodwin said the group has demonstrated the scale benefits achievable from sharing processes and infrastructure across its businesses, with costs growing by three per cent to £2.85 billion.
“Our platform has handled significantly greater business volumes, yet we have held technology and customer support expenses almost flat. This performance has provided us with the wherewithal to continue to invest in further enhancements to customer service. 2006 also saw the successful integration of Ulster Bank’s core systems onto the group’s IT platform.” It also seems to be well organised in terms of compliance, and has said that it has submitted its application for qualification for the Basel II Advanced Internal Rating based approach at the end of last year, and will run in parallel this year.

“We have continued to build our market share in UK retail, commercial and corporate banking, increased our customer base in Europe and made good progress in building a platform for sustained growth in North America,” said Goodwin, in his CEO’s review. “We have also laid the foundations for a growing share in the vibrant financial services markets of the Asia-Pacific region. The breadth of the group’s businesses is reflected in our results: 42 per cent of our operating profit came from outside the UK.”
RBS is still blazing the acquisition trail, vying with Barclays to buy Dutch bank ABN Amro. At the time of writing, the bank was in talks with Bank of America to strike a deal on acquiring LaSalle. LaSalle, which has the largest US presence of any overseas bank, is the US unit owned by ABN Amro that lies at the heart of the battle for control of the Dutch bank. A deal struck with Bank of America could tip the balance in the bid battle and, possibly, trump Barclays' offer. The proposed compromise is that the US bank's assets would be split between suitors RBS and Bank of America. Another option is for Bank of America and RBS to each buy pieces directly from ABN.

In an innovative move to provide security, RBS has also announced plans to rollout handheld authentication devices to its online retail banking customers.

RBS is one of the first banks in the UK, along with Barclays, to provide its customers with smart card reader devices which use a two-factor authentication system. RBS customers will be able to use the devices to access their personal web banking accounts by inserting their smart debit card into the reader and input their normal four digit PIN code.

“The breadth of the group’s business is reflected in our results: 42 per cent of our operating profit came from outside the UK”
– Sir Fred Goodwin, CEO, Royal Bank of Scotland