In an effort to comply with the U.K.’s ring fencing requirements, The Royal Bank of Scotland Group plc (RBS - Snapshot Report) is set to separate retail operations from its higher-risk businesses. This will lead to a change in its legal entity structure over the next two years.
What is Ring Fencing Requirement?
Ring fencing is the largest structural reform imposed on the U.K. banks. It requires banks with more than £25 billion in deposits to separate their essential banking services from investment banking services with effect from Jan 1, 2019. This is to prevent a repeat of the financial crisis of 2008, when banks’ poor investment decisions pressurized ordinary depositors, leading to big taxpayer-funded bailouts.
How RBS Intends to Reorganize
The bank announced that at the beginning of 2017, it will introduce an intermediate holding company called “NatWest Holdings Limited” for the ring-fenced banks comprising RBS’ personal, private, business and commercial customers, the National Westminster Bank Plc, Adam & Company PLC ( which will be renamed “The Royal Bank of Scotland plc”) and Ulster Bank Ireland DAC.
Apart from this, the bank’s Corporate and Institutional Banking business will be called NatWest Markets Plc and will be the non ring-fenced entity, along with the group’s Channel Islands operations.
Both NatWest Holdings and NatWest Markets will function as a subsidiary of RBS Group plc, which will remain the group holding company.
The bank, which is 73% owned by the British, revealed that NatWest would become its main retail brand in England, Wales and Western Europe, while its historic Royal Bank of Scotland will be its core brand for Scotland.
The Chief Executive at RBS, Ross McEwan said, "Our proposed future structure under the ring-fencing legislation and our brand strategy are key elements of the bank we are becoming. The future ring-fenced structure of the bank is not only designed to be in compliance with the new regulatory requirements and objectives but will better reflect who we are as a bank and what we stand for: a bank that is focused on its customers."
Along with RBS, some other banks outlined similar business plans earlier this year in order to comply with the ring-fencing requirement.
Notably, HSBC Holdings plc (HSBC - Analyst Report) announced the relocation of its U.K. business to Birmingham last year, while Barclays PLC (BCS - Analyst Report) disclosed its intent of dividing the group into Barclays UK and Barclays Corporate & International.
The ring-fencing regulation is expected to create a wide range of strategic and operational issues for legal and commercial functions within the U.K. banks. It will have implications for arrangements relating to tax, real estate, employment, pensions, third-party contracts, and litigation and will affect each of the large U.K. banks differently.
Currently, RBS carries a Zacks Rank #3 (Hold).
A better-ranked stock in the same space includes Banco Macro S.A. (BMA - Snapshot Report) , sporting a Zacks Rank #1 (Strong Buy). It has witnessed an upward earnings estimate revision of nearly 3.1% in the past 60 days and its stock price is up 37% year to date. You can see the complete list of today’s Zacks #1 Rank stocks here.
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