A poor showing in banking league tables, a third-quarter pre-tax loss of £1.4bn loss, the hangover of ABN Amro... To the uninitiated, it would seem that RBS is still in turmoil. However, as its global head of banking, deputy CEO of GBM and EMEA head explains, a deeper analysis shows signs of recovery. Writer Geraldine Lambe

When Royal Bank of Scotland posted a pre-tax loss of £1.4bn ($2.25bn) for the three months to September 2010, compared with a profit of £1.2bn three months earlier, the dispiriting figure belied a more healthy business underneath. Accounting charges of £1.7bn pushed RBS into the red and disguised significant improvements in its core businesses; if one-off charges relating to the value of the bank's debt and insured assets were stripped out, RBS would instead have posted a 10% increase in core operating profit to £1.7bn, the third quarterly increase in a row.

This is almost emblematic of the RBS story. It has been described as 'a good business wrapped inside a basket-case'; its controversial acquisition of ABN Amro - disastrous in terms of timing and price, and damaging in terms of shareholder value - has overshadowed what was a good strategic match.

Marco Mazzucchelli, global head of banking, deputy CEO of global banking & markets (GBM), and head of Europe, the Middle East and Africa (EMEA) at RBS, says that from a business mix perspective, ABN "was and is a fantastic fit" for the bank.

"GBM is a stronger competitor today than it would have been with RBS's standalone business. The addition of ABN Amro's emerging market strength and its advisory and equities franchise mean that, in the investment banking business, we can be more meaningful for our clients. Structurally, we are much stronger," he says.

Like many other investment bankers these days, Mr Mazzucchelli also sees value in the global transaction services business - another key attraction of the ABN Amro business to RBS. Once seen as an unglamorous if necessary function of global commerce, the 'sticky' client revenues provided by cash management and securities services are increasingly viewed by investment bankers as an excellent jumping off point for deeper client relationships.

"The GTS business enables us to embed ourselves with the client. Fulfilling these kinds of functions means that you become entrenched with their business and offer a crucial vantage point of the client: you know what their business is doing, and how their business is doing. This offers corporate bankers a unique insight into clients and means we can better service their business."

The addition of an equity franchise helped to secure RBS a role on some of last year's big rights issues - including Rio Tinto, Genting, HeidelbergCement and Cemex; work on initial public offerings includes Delta Lloyd's €1bn listing in November 2009 and Medica's €313m listing in February.

M&A and broking gains

RBS has also won some significant merger and acquisition (M&A) mandates this year. Deals include advising German company VEM on its €3.6n sale of Ratiopharm in the early part of 2010, and acting as sole advisor and lender to Cheung Kong Infrastructure (CKI) on its €5.8bn purchase of EDF's UK assets in July.

The latter - RBS's biggest-ever sole mandate and one of the largest ever Asian buys into Europe - shows how M&A can be bolted on to win new business from existing clients: RBS was one of CKI's key lenders for its 2005 takeover of the UK's Northern Gas Networks.

There are also signs that business is picking up at RBS Hoare Govett, the bank's UK corporate broking business. In July it was appointed joint corporate broker alongside Deutsche Bank to UK telecoms group Cable&Wireless Worldwide. The first FTSE 100 client win since Hoare Govett was acquired as part of ABN in 2007, this may signal an end to its slide down the corporate broking tables, where it has fallen from second to eighth according to the most recent data from Hemscott.

Thus far, however, deal activity has not translated into improved league table positions. RBS still languishes at 18th in Dealogic's global equity capital markets rankings and 14th in EMEA. Similarly, in M&A the bank sits at 17th in the global rankings and 14th in EMEA.

Mr Mazzucchelli says RBS's league table positions must be put into perspective. "In terms of global M&A and equity we do not have a domestic presence in the US, Japan, China or Brazil, so this year, for instance, we are not competing in about 60% of the market," he says.

The key point, he argues, is that RBS is not aiming to be a leading M&A or equities house. The plan is to have a full set of tools to offer clients. "It is all about integrating M&A and equities into our franchise, to create a meaningful set of products and services for our clients, and leverage our core strength as a financing and risk management house. That is the prism through which we see our platform."

Just as important, themes such as liquidity management and funding profiles - traditionally not high on a CEO's agenda - are now seen as key risks, and discussion about them has moved from the treasurer's office to the boardroom. This means that the strength of the bank across the debt markets has become a much more powerful proposition.

"Before the crisis, financial markets were so liquid that financing was typically not a problem. This all changed when markets closed," says Mr Mazzucchelli. "Funding profiles and liquidity risk suddenly became part of the strategic dialogue that we have with CFOs and CEOs. Because we are a key player in product areas such as rates, derivatives, foreign exchange, and in risk and liquidity management, we are in an excellent position to increase our market share."

Even in what RBS sees as its core business, however, it is lagging behind other big debt capital markets power houses in the league tables, only reaching 10th globally and seventh in EMEA for the first nine months of this year, according to Dealogic.

Mr Mazzucchelli argues that league tables - while a useful indication of activity - do not give an accurate snapshot of the bank's true strength across debt and financing. "Official league tables represent only a small amount of the total client wallet."

He argues that other measures, such as surveys by US-based Greenwich Associates (in which the top 500 corporates in the US, Europe and Asia name the banks they use for credit and other banking services, and rate these providers according to a series of detailed criteria) give a more complete picture of how banks are performing.

According to Greenwich Associates, RBS is doing better than many might think. In the 2010 US Share Leader ranking, RBS is joint fifth with Deutsche Bank in terms of market penetration of large US corporates, with 38% of respondents saying they carry out a variety of corporate banking activities with the firm. (First to fourth positions are taken by Bank of America Merrill Lynch, JPMorgan, Citi and Wells Fargo, respectively.)

In the 2010 European Large Corporate Banking Survey, RBS is third in terms of market penetration in Europe for overall corporate banking (53%), debt capital markets (30%) and cash management (38%).

"There is a 'perception lag' in terms of the amount of business we know we are doing, and how we are measured externally," says Mr Mazzucchelli.

That perception gap may be closing, however. He believes that recent accusations of balance sheet bullying - that RBS uses its debt and corporate lending to cajole clients to give it equity and M&A business - is a sign that other banks have "woken up to the fact" that RBS is alive and doing increasingly well.

"We are not 'paying to play'," says Mr Mazzucchelli. "We have an integrated franchise and use all the products at our disposal. Like all banks, we use the entire platform to build our business."

Bitter medicine

RBS's return to health is an ongoing and painful process. Not least for the bankers, who have had to get used to a much stricter regime in terms of clients, capital use and performance. For GBM, the number of clients has been whittled down to about 2000 from a notional 20,000. Capital is available, but it is allocated carefully and profitably.

Bankers are closely monitored. Every week, their business is reviewed in terms of wins, losses and deal pipelines. And the criteria are harsh. If a banker wins a bond deal but does not get the hedging business, this is booked as a 'miss' on the 'banker score card' - the measure by which each banker is assessed and on which the bonus is calculated.

"There is nowhere to hide," says Mr Mazzucchelli. "Every banker has revenue targets per client that they should meet. And we remove net interest from the [banker's] 'score card', so lending is not a key driver for generating new business within global banking. We only hire the kind of bankers who are interested in this model."

In addition, GBM's discipline is paying off: the bank estimates that since the beginning of 2009, it has increased its share of the corporate wallet by about 1%, and the FIG wallet by about 1.5%. And this growth was achieved at the same time as shrinking RBS's loan book by about 50%.

Mr Mazzucchelli is no stranger to bank turnarounds - he joined Credit Suisse First Boston, as was, when it was in the middle of its own rejuvenation. The chance to take part in the mother of all bank revivals was irresistible, he says.

More importantly, he believes it is entirely doable. "I did not fully appreciate the power and potential of this platform until I joined the bank. There is still some way to go, but already we are a vastly more efficient and balanced organisation."

Career history

Marco Mazzucchelli

2009 - Joined RBS as deputy CEO of global banking and markets, global head of banking, and head of EMEA

2004 - Joined Credit Suisse, London as head of EMEA investment banking. Also appointed to the bank's operating committee. Later promoted to head of business and client development at Credit Suisse

2001 - Joined Sanpaolo IMI as CEO of the asset management and insurance divisions.

Was also chairman of its alternative and institutional businesses and international private banking

1998 - Joined Monte Dei Paschi di Siena as chief financial officer

1990 - Joined Morgan Stanley in London in the fixed income division. Rose to become managing director. Has also served as deputy chairman of EuroMTS and as a board member of Borsa Italiana

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