PESTLE and SWOT analysis of Royal Bank of Scotland 2016-2017
- For Barclays Pestle and Swot analysis, see Barclays Pestle & Swot.
- For Lloyds Bank Pestle and Swot analysis, see Lloyds Bank Pestle & Swot.
- For HSBC Pestle and Swot analysis, see HSBC Pestle & Swot.
Royal Bank of Scotland is a UK based banking and financial services provider with operations in UK and Ireland where it operates as Ulster Bank. In England, it operates as the NatWest brand while in Scotland, it is still RBS where it has been serving Scottish customers since 1727. RBS has operations in a diverse set of consumer and wholesale businesses including retail, credit cards and mortgages (operating as RBS, NatWest & Ulster), wealth management (operating as Coutts), commercial and corporate lending (operating as Lombard, Adam & Co. etc). It is part of the UK big four, referring to the four largest UK-based banking groups which also include HSBC, Lloyds and Barclays. Latest revenues for the year ending 31 December 2016 were approximately £12.590 billion on operating losses (before tax) of £4.080 billion (RBS Annual Report 2016).
2.0 RBS PESTLE analysis 2016-2017(Opportunities and threats)
2016 was a very challenging year for RBS shareholders, with the bank making an attributable loss of £7.0 billion while embarking on a mega restructuring strategy designed to ring-fence primarily its core retail and commercial banking operations in the UK and Ireland and make it much smaller, better capitalised, and less leveraged. Much of the loss has been primarily due to efforts to resolve legacy conduct issues including legal actions, all a legacy of the banks heavy involvement in the 2008 financial crisis. The effects of Brexit, low interest environment as well as sluggish UK economic growth represent some of the key external macro factors that have impacted the Royal Bank of Scotland’s operational environment.
In order to get a more lucid picture of why RBS is struggling for the past few years as well provide some recommendations and personal suggestions for the organisation’s future strategic practice, we will use tools such as PESTLE, SWOT, Porters Five Forces and BCG Matrix. Of these, PESTLE is the most important as it helps us to analyse the macro environment and identify how current and future trends in the political, economic, social, technological, environmental and legal environments impact individual organisations. We can then study the key drivers of change behind the PESTEL factors to identify both opportunities and threats in a firm’s external environment and industry and focus on overcoming them through deploying strengths while eliminating weaknesses. This is why PESTLE is only a starting point since other frameworks such as SWOT have to be used in conjunction to help firms like RBS utilise internal core competencies so as to take advantage of opportunities while neutralising threats in its industry.
2.1 Political environment
2016 was a challenging political environment for RBS, characterised by new regulatory capital rules from the EU forcing banks to ringfence core operations as well as the introduction of a new 8 percent surcharge on bank profits in January 2016 by the UK government. This surcharge is especially more taxing for banks with an overseas subsidiary, thus contributing to the major decision to divest many RBS overseas operations including Citizens in the US (Annual Report 2016).
Following the 2008 financial crisis, the EU Basel committee came up with new capital requirements collectively known as Basel III to review and monitor the capital adequacy of banks in a case of a crisis. The idea was to ensure banks capital strength by forcing them to have minimum capital reserves (including CET1, Tier 1 and Tier 2 capital), so that they can absorb financial shocks, losses as what happened when many banks went under after 2008 due to non-performing loans triggered by the subprime mortgage crisis. Beginning 2015, new Basel III capital requirements following the original Basel II rules require banks to fund themselves with 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets (RWAs). A minimum Common Equity Tier 1 (CET1) ratio of 4.5% must now be maintained at all times by banks by 2019. On its part, RBS maintained a CET1 ratio of 13.4% during the year (Annual Report 2016).
However, the biggest political shock was Brexit when in June 2016, Britain voted to leave the EU, a move predicted to cause both political and economic upheaval and uncertainty for not only UK based firms but also the UK economy in general, at least in the short term (Douglas and Gross 2016). For RBS, the continued demand for another Scottish referendum in opposition to Brexit is a potential threat and if successful could force the bank to move its Edinburgh headquarters to London.
2.2 Economic environment
The economic risk and uncertainty of a UK exit from Europe poses a significant challenge to many banks including RBS. Depending on the eventual international agreement between Britain and the other EU member states, the potential implications to leave the EU are many, as evidenced by the consequential decline in the value of pound sterling against the major currencies, a situation that could get worse if Britain does eventually leave the EU by 2020 (Davies 2017). For RBS, Brexit does come with possible negative consequences for capital, operations and regulation, along with the impact for its employees, clients and customers (Annual Report 2016).
The short-term effect of Brexit within the wider economic environment which did impact RBS operations was a low interest rate environment. The Bank of England reduced the base rate from 0.5% to an even lower 0.25% in August 2016 following Brexit. A low interest rate environment for banks is a challenge to profitability. On top of this, the UK economy grew by 2% in 2016 which was a little slower than the previous year (Annual Report 2016).
2.3 Social environment
The social environment includes changes in demographics, lifestyles or changes in fashion, labour and social mobility. Social changes in general have the potential to either be threats or opportunities for banks such as RBS. One such demographic change with potential to affect RBS developed core markets in the UK is the ageing population and what it means for future product and service offers. According to the Office for National Statistics (ONS), the UK median age has over the last 40 years increased from 33 years in 1974 to 40 years in 2014 (ONS 2015). The UK is further expected to see double-digit growth in the number of 55-64-year-olds by 2019. An ageing population comes with business opportunities for RBS as pension age consumers have more incomes and earn higher disposable incomes. For RBS and other banks, such a shift means a drive towards savings, investment and wealth management as a baseline service to meet the needs of pension age customers alongside credit and consumption services that have been growth drivers in the past (PwC 2016).
2.4 Technological environment
When it comes to the technological environment, the banking industry has reached a tipping point where digital capabilities are accelerating the evolution of banking so fast that literally every facet of banking can now be done online. The financial innovations with the potential to revolutionize finance and transform the international monetary ecosystem currently include blockchain technology, biometrics, robotic automation and the rise of FinTech firms (Lonergan 2016; CapGemini 2016). The rise of FinTechs, agile, digital players that are leveraging technology to enter financial markets with simple, easy-to-use, convenient, and cost-effective products and services to customers, has especially had a significant impact on the banking industry due to their disruptive technology (PwC 2016; CapGemini 2016).
On its part, RBS continues to develop new technology and invest in digital and mobile capabilities to improve and differentiate their offering, while remaining constantly vigilant to and investing in, fraud prevention, cyber risk, IT security and the appropriate management of data (Annual Report 2016). The only constraint in upgrading and enhancing its IT systems has been the operational burden of divesting Williams & Glyn as part of the State Aid commitments in 2008 since the process has proven complex (Annual Report 2016).
2.5 Legal environment
The Royal Bank of Scotland has been defending as many as 15 mortgage lawsuits and investigations in the US, including advanced talks with the Federal Housing Finance Agency (FHFA) over the mis-selling of toxic mortgage bonds to the US government-backed loan firms Fannie Mae and Freddie Mac in the run-up to the 2008 financial crisis, when RBS was among the biggest players on Wall Street (Kleinman 2017; Partington 2017; Arnold and Dunkley 2016). The settlements will cost RBS more than $4.5bn (£3.5bn). These settlements come before even RBS is yet to engage in formal settlement talks with another US regulator, the US Department of Justice (DOJ) about another big penalty related to residential mortgage-backed securities – a penalty one US agency has estimated could take RBS total outlay to $13bn in legal costs (Arnold and Dunkley 2016). These litigation costs come just after RBS agreed to pay $1.1bn to settle some of the legal claims against it with the National Credit Union Administration Board in 2016, and further tarnish RBS reputation which has already taken a massive hit since the financial crisis.
Nevertheless, a deal with the Federal Housing Finance Agency (FHFA) and the US Department of Justice (DOJ) would be another important step along the road to helping RBS shed its remaining financial liabilities from the pre-crisis era. The Royal Bank of Scotland is the last of 18 banks to settle with the FHFA, although a number of other banks are also yet to settle with the DoJ, including Barclays, which is embroiled in a legal battle with the agency (Kleinman 2017).
2.6 Environmental factors
The transition to a low carbon and resource-efficient future is underway, affecting almost every sector of the economy. Local environmental considerations such as air quality, flooding and natural habitats also remain a major concern. The Paris Agreement provides a framework by which the world will seek to prevent dangerous climate change but further challenges remain. RBS PLC recognizes the current trends in consumers and governments demanding businesses to reduce their carbon foot print. In its 2016 Annual Report, the bank committed to reducing its own carbon foot print by buying renewable electricity, diverting 98% of waste from UK landfills and reducing use of paper in preference for online statements when communicating with customers (Annual Report 2016).
Figure 1: RBS pestle analysis 2016-2017
3.0 RBS BCG Matrix
Royal Bank of Scotland BCG Matrix available upon request.
4.0 RBS SWOT analysis 2017
- During the year 2016, RBS sought to mitigate where possible the impact of many of the macro challenges and threats analysed in PESTLE (figure 1) such as Brexit, civil litigations, fines and government regulatory pressure while also benefiting from the existing opportunities such as a reduced balance sheet, and growth in mortgages.
- Diverse business profile.
- High Dow Jones Sustainability Index.
- RBS is largest commercial bank in the UK.
- RBS has not been profitable since 2007 and this continued in 2016 with the company making an attributable loss of £7billion.
- Material legacy conduct issues are still holding RBS back especially in relation to various litigations regarding the mis-selling of toxic mortgage bonds in the run-up to the 2008 financial crisis. RBS also still needs to resolve European Commission State Aid commitments including the need to sell off Williams & Glyn, which has so far proven extremely complex and has actually held back the upgrade and enhancement of a new RBS technological infrastructure which needs to be modernised and be cyber resilient.
- Divesture of Williams & Glyn has proved to be time consuming and extremely complex.
- RBS still has legacy RWAs.
- The strategic divesture of its shareholding in Citizens in the US as well as ending active operations in more than 25 countries as part of the continued restructuring to ringfence its UK operations, will improve core return and eliminate drag from non-core, further progressing the resolution of pre-crisis conduct issues (Annual Report 2016).
- Digital innovation a future avenue for growth and improving customer service experience.
- Growth in new mortgage lending market share as currently, demand for housing in many parts of the UK outstrips supply (Annual Report 2016, p.33).
- Brexit uncertainty is bad for many UK businesses including RBS. Management have already come up with contingency plans to establish an enhanced presence inside the EU to handle RBS EU activities within the borders of Europe should this be required as a result of the Brexit negotiations (Financial Times 2017).
- Regulatory pressure including new capital requirements.
- Introduction of a new 8 percent surcharge on bank profits in January 2016 by UK government.
- Legal penalties by the US Department of Justice (DOJ) still pending over residential mortgage-backed securities – costs one US agency has estimated could take RBS total outlay to $13bn in legal costs (Arnold and Dunkley 2016).
Figure 2: RBS SWOT analysis 2016-2017
5.0 RBS Five Forces Analysis
Royal Bank of Scotland Five Forces analysis available upon request.
2016 was a very challenging political environment for RBS characterized by continued restructurings due to new regulatory capital rules from the EU, Brexit as well as the introduction of a new 8 percent surcharge on bank profits in January 2016. The bank had to exit more than 26 countries as the mandatory ring-fencing of its operations continued to enable it focus on its core UK market. The bank was also involved in defending as many as 15 mortgage lawsuits and investigations amounting to payments of more than $4.5bn (£3.5bn) to the US Federal Housing Finance Agency (FHFA) in litigation costs and settlements over the mis-selling of toxic mortgage bonds in the run-up to the 2008 financial crisis.
While such material legacy conduct issues remain, its working to solve them and management are optimistic RBS will finally be profitable in 2018 after more than a decade of loss making. Its exit of 26 countries and divesture of many subsidiaries has improved the banks’ balance sheet making it smaller, better capitalized and less leveraged thus well prepared to focus on its core UK market.
Available upon request.
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