“We recognise the public’s anger” says Ewen Stevenson, the CFO of Royal Bank of Scotland (RBS). As the finance chief of what was the world’s largest bank, that became a byword for corporate disaster, he has a huge task on his hands turning it around.
When it crashed at the peak of the financial crisis, RBS had assets of £2.4 trillion- making it 50% bigger than the UK economy.
So great was the size of RBS’s toxic balance sheet, especially after the ill-fated acquisition of Dutch bank ABN Amro in 2007, that it required tens of billions of pounds of taxpayer’s money to shore up the bank.
Stevenson was an obvious candidate to become CFO of RBS in 2014, having been part of investment bank Credit Suisse’s team advising Gordon Brown’s government on an emergency restructuring of the bank in 2008.
But despite that experience, Stevenson was still shocked by the size of the challenge in bringing RBS back to health, alongside CEO Ross McEwan who has led the bank since 2013.
“We’ve been surprised at the cost and amount of clean-up required. It’s been more extensive than we would have anticipated four years ago”, says the softly spoken Stevenson, born in the UK, who then grew up in New Zealand.
Corporate car crash
Stevenson closely followed the rapid rise and fall of RBS, having been a long time financial institutions investment banker, following study in accountancy and law at the Victoria University of Wellington.
At Credit Suisse he advised rival Bank of Scotland that lost out to RBS in the race to acquire high street giant Natwest in 2000, but recognised the logic behind Goodwin’s audacious raid. “In the first few years they drove through a lot of synergistic value. The only thing they didn’t do was integrate the systems,” he says, acknowledging the later significance of that omission.
RBS’s relentlessly aggressive growth strategy under CEO Fred Goodwin, “where volume growth was equated to value growth” soon became clear, says Stevenson. In the US, where wrongly valued debt structures led to the sub-prime crisis that spiralled into the financial crisis, “RBS became the fourth biggest writer of residential mortgage backed securities from a standing start,” he explains.
RBS’s toxic balance sheet became increasingly risky- taking huge exposures in UK and Irish property. But it was the knockout £49bn bid for ABN Amro in 2017, defeating a rival approach from Barclays (which Stevenson advised), that resulted in the ultimate corporate car crash.
The perfect storm that threatened the global economy in early 2008 quickly engulfed RBS, along with Belgian-Dutch bank Fortis, although the third member of the consortium Spanish bank Santander escaped such problems.
RBS soon began to unravel despite denials from Goodwin and his team and following a £12bn rights issue in April, for which shareholders later sued the bank, a first corporate loss in 40 years was announced in August of that year.
By the time Stevenson and other members of the Credit Suisse team were hired to save RBS in October 2008, the financial crisis was in full swing- Lehman Brothers having collapsed the previous month. He also advised the government to save Lloyds Banking Group after it acquired the stricken HBOS and on the break-up of Northern Rock after its nationalisation in 2008.
On life support
In a frenzied atmosphere, Stevenson and colleagues helped save RBS with two tax payer bail-outs. “It was an extraordinary period of time- Lehmans had collapsed a few weeks earlier, most major banks were under significant risk of failure,” he states.
An initial £20bn capital injection failed to stabilise the bank, so a subsequent bail-out of £25bn was organised soon after. “It was very much about rescuing and stabilising the bank.” The result was that the taxpayer ended up acquiring 81% of the bank.
“Had RBS failed, it was impossible to understand the second order implications for the UK economy”, reveals Stevenson.
At the same time as the second bail-out, Stevenson helped develop the Asset Protection Scheme (APS) which was used largely by RBS to shelter £282bn of its most toxic assets. The end result has been a taxpayer-backed commercially run bank.
Stevenson says that a full nationalisation was never an option because the full balance sheet of £2.2-2.4 trillion would have been added to the national debt. “It was certainly discussed but never seriously contemplated. From memory, there wasn’t any particular dissent on the decision to inject capital in the way that we did,” he insists.
Into the fire
So why take up one of the world’s toughest finance roles, rebuilding the bank so that its taxpayer-owned majority, now at 72%, can be sold off?
Stevenson says the breadth of the task was too good an opportunity to pass up. “Here was the biggest, most complex bank failure and most complex bank restructurings. So if you like big, complex, intellectual challenges it didn’t come any more challenging than this,” he says.
Despite all his experience, the reality of the situation was very different to what he had expected. “The core customer franchises were actually much better than I had expected, but the bad parts were much worse,” he says.
The ability to clean up the bank so that it can be sold off has been hindered by a range of problems including big legacy issues such as Libor and Forex trading scandals that have resulted in huge annual losses. The latest full year results in February saw a £752m underlying profit, the first profit since the financial crisis, and a massive improvement on a loss of £7bn the previous year.
But this was marred in March by a $500m settlement with the state of New York for selling residential mortgage-backed securities (RMBS) ahead of the financial crisis. A multi-billion dollar settlement with the US Department of Justice for more RMBS-selling is yet to be agreed.
But the biggest challenge was addressing RBS’s weak capital position. When he arrived the core tier 1 capital ratio (the main method of understanding financial strength) was 8.6%, that rose to 15.9% by the end of 2017. “Rebuilding the capital strength of the bank was the absolute priority when I joined,” says Stevenson.
Making the grade
The next milestones are the bank’s capital tests in late November, and ultimately a sell-off of the taxpayer-owned tranche.
A big part of this process requires hacking away at the cost base by selling assets or running them down. “We were the biggest bank in the world so the cost structure was consummate with being much greater than the overall size of the business,” he says.
Two big legacy issues remain- the DoJ settlement and fixing the group’s defined benefit pension scheme– which he says has been underfunded for years. “We’ve been working hard with the trustees since 2016 to get a set of future payments in order to adequately fund that plan,” he says.
A radical change in culture is also needed, given the scandal that has engulfed RBS’s Global Restructuring Group.
A report from the Financial Conduct Authority (FCA) published earlier this year condemned the “widespread inappropriate treatment” of small firms transferred into the unit in the period 2008-13.
Given this happened post-restructuring there are questions around how the bank’s new structure gave it licence to or even demanded such an aggressive approach. But Stevenson says: “On GRG we’ve been very public about the mistakes we’ve been trying to put right,” he says.
In February, Labour MP Clive Lewis said on reading the FCA report RBS executives had misled MPs when they appeared in front of a Treasury Select Committee on the issue. “Far from being isolated incidents of poor governance… this report explicitly states their behaviour was ‘systemic and widespread”, he said then.
Stevenson says New Zealander CEO Ross McEwan “has done a fantastic job on culture- re-engaging and re-focusing the bank. If you look generally at the trust metrics of the bank, having trust troughed a few years ago- that’s been steadily improving,” he insists. “In the retail bank we’ve moved away from the bonus culture with no impact at all on the underlying performance of the business.”
Endgame in sight
Is RBS at a point where there’s little chance of another big legacy issue appearing? “I think we would all be devastated if we found another large significant conduct issue that we weren’t aware of at this point,” says Stevenson.
Given the size of the RBS disaster, that has created wide scale public and shareholder resentment, Stevenson is aware of the need to restore trust.
He believes that he and McEwan have made the right moves in their efforts to downsize to a more focused UK retail and commercial bank. “When I reflect over the last four years, I’m not sure there’s strategically much different that we would have done,” he advises. “We think we’ve made absolutely the right calls.”
Although £4bn of cost savings have been achieved in the last four years, a concession that costs of restructuring over the next two years would amount to £2.5bn instead of expected £1.5bn of costs has concerned market followers.
Stevenson won’t say whether the big gap between the figures reflects a shortfall in information coming out of the group- instead citing “various issues” including costly long term real estate contracts.
“We try to be as open as we can be, as and when we can be open,” says Stevenson, referring to how he and McEwan respond to City demands for information on the bank’s future.
What will success look like? “Having completed the turnaround, executed a successful privatisation and restored trust with our customers and communities would be a great set of outcomes for us,” says Stevenson.
In the meantime, Stevenson says there is a long road ahead to the sell-off. “We’ve got a lot to do before we’ve done. We’re less ahead than we thought we would have been at this point, on the privatisation and resolving RMBS,” he says.
“We’re both committed to seeing it through,” says Stevenson, who recognises the difficulty of the task in hand: “It is far harder and far more complex than I’d imagined.”