By Matt Scuffham
LONDON (Reuters) - Royal Bank of Scotland (LONDON:RBS) (L:RBS) will drastically shrink its investment banking operations, pulling out of 25 countries across Europe, Asia and the Middle East and allowing the state-controlled lender to refocus on local lending in Britain.
RBS is seven years into an unprecedented corporate diet, shedding over 1 trillion pounds in assets as it retreats from the acquisitions that once made it the largest bank in the world and an enormous financial burden for British taxpayers when the credit bubble burst in 2008.
The bank reported a 2014 loss of 3.5 billion pounds on Thursday, hit by a writedown on the value of its U.S. business Citizens and new charges relating to foreign exchange investigations and mis-selling.
RBS, 79 percent owned by the British government, remains hampered by a number of investigations into past misconduct by authorities around the world which threaten to undermine its turnaround under Chief Executive Ross McEwan.
It said on Thursday that three staff were dismissed in recent days as part of its probe into failings at its foreign exchange business and German authorities were looking at whether its private bank in Switzerland helped some clients evade tax.
"If we find anything that has evidence of wrongdoing we will come down incredibly hard," McEwan told reporters.
RBS has previously said that its Coutts International business, which is up for sale, was the subject of a tax evasion probe by U.S. authorities but it warned of the investigation by German authorities for the first time on Thursday.
The bank launched an internal probe into its foreign exchange trading practices last year after it was one of six banks fined a combined $4.3 billion for failing to stop traders trying to manipulate currency markets.
"Where people have done things wrong we want to hold them accountable," said McEwan.
Last year's loss was a big improvement on the 9 billion pound deficit chalked up in 2013 but RBS has yet to turn an annual profit since the financial crisis. It has lost 49.5 billion pounds over that period, more than the 45 billion pounds taxpayers paid to bail it out in 2008.
Shares in RBS were down 5.3 percent at 3.40 p.m., compared with a 1.1 percent rise in the European banking index (SX7P).
INVESTMENT BANKING RETREAT
To bolster capital and generate better returns, McEwan said the bank's investment banking division would reduce its presence in Asia significantly and withdraw from central and eastern Europe, Africa and the Middle East, cutting swathes of jobs and 60 percent of assets.
"Let me be quite clear this marks the end of the standalone global investment bank model for RBS," McEwan said.
Rory Cullinan, RBS's highly-regarded restructuring chief, will be made chairman of the corporate and institutional (CIB) division to oversee the retrenchment.
Cutting back on expensive investment banking activities will reduce the amount of capital RBS has to set aside, raising its capacity to potentially return some money to shareholders.
The bank said by next year it hoped to be able to start discussions with UK regulator the Prudential (LONDON:PRU) Regulatory Authority (PRA) about resuming dividends.
Finance Director Ewen Stevenson said for those talks to happen the bank would need to be past the peak of litigation costs associated with a U.S. probe into the sale of mortgage-based bonds, which he said would likely happen this year.
"We need to have confidence and sustainable profitability at that point which we believe we'll have," said Stevenson.
A poster child for what went wrong in British banking, RBS is under pressure to focus on lending to local businesses and consumers and to ensure that it does not return to the swashbuckling, big bonus days of the past.
In a letter to Howard Davies, confirmed on Thursday as the new chairman of RBS, Britain's finance minister spelled out what he wanted.
"I look to you and Ross McEwan personally to ensure that the entirety of the bank's business is conducted to the very highest ethical standards," George Osborne wrote.
"My priorities for RBS are these: it is a British bank focused on the British economy, with lower bonuses and with a plan to get the taxpayers' money back."
