Justin Malta of RBS charts the turnaround in vision and management approach in the 1990s that took the bank from a second-tier ranking in the UK to being the sixth largest in the world.

At the beginning of the 1990s, The Royal Bank of Scotland, though founded 265 years previously in 1727, was still ranked firmly in the second tier of UK financial institutions. Yet, by the end of 2004, the AA- rated bank had £519bn of assets, more than 130,000 employees and 30 million customers worldwide. Within 12 years, a second-tier player had become the sixth-largest bank in the world and the second largest in Europe.

Three things powered this startling transformation: firstly, a far-reaching internal reform project led by Sir George Mathewson in the 1990s. Secondly, from 2000, the successful execution of 21 rigorously managed acquisitions, most notably the contested takeover of National Westminster Bank (NatWest). Thirdly, and most importantly, the delivery of powerful and consistent organic growth.

Internal reform

In 1992, it was clear that The Royal Bank of Scotland was facing challenges. It made no profit at all that year and, ironically, the bank was freely talked about as a ripe takeover target for NatWest. The need for far-reaching change was clear. Newly appointed CEO Sir George Mathewson launched Project Columbus, a plan for root and branch reform. Until that time, the bank was structured as “a series of fiefdoms”, according to Sir George. Project Columbus turned that on its head, sweeping away the old approach and installing a more forward-looking management with modernising practices and policies.

The bank became more aggressive and hungry to lend. As a result, RBS began gaining market share as the economy recovered from the early 1990s recession. By 1998, the bank was once again in robust shape and, in that year, became the first Scottish company ever to unveil profits of more than £1bn. The foundations had been laid for a move into the premier league.

Successful acquisitions

The opportunity came shortly after. RBS’s historic rivalry with the Bank of Scotland exploded into one of the hardest-fought takeover battles in British banking history, and the biggest – the takeover of NatWest. Bank of Scotland fired the first shot, bidding £21bn in September 1999. RBS counter-offered and vice versa. Six months later, in February 2000, RBS finally won and purchased NatWest for £26.5bn.

The following year, Sir Fred Goodwin took over as CEO, and Sir George became the new chairman. Under their leadership, RBS and NatWest were integrated successfully by 2003, producing cost savings and revenue synergies of more than £2bn. This ability to cost-effectively integrate acquisitions was then transplanted to other transactions, including the purchase of UK insurance player Churchill in 2003 and US bank Charter One in 2004.

Organic growth

Most importantly, the group’s organic growth has been central to its success. Its early track record of innovation (for example, inventing the overdraft and coloured banknotes) has continued through to the present. In 1985, it established Direct Line, the fast-growing and increasingly international insurance company. Similarly, in the 1990s, the bank started a joint venture with the Tesco supermarket chain to provide banking and insurance services under the Tesco Personal Finance brand.

The bank has also driven growth by deepening its presence in the wholesale markets. For example, Corporate Banking and Financial Markets, the company’s largest division by income and operating profit, grew by building on both its relationships (for instance, 2500 banks globally) and its product capabilities. Traditional strength in structured finance, asset finance and lending was buttressed by the development of a financial markets product set including credit products, FX and derivatives.

The bank then went on to develop its European debt origination and securitisation capabilities. Likewise, RBS Greenwich Capital in the US has built on its leading position in the US Treasury and asset-backed securities/mortgage-backed securities markets. It is currently expanding its offering in US corporate capital markets and structured credit.

Growth through geographic expansion has also been pursued. What had been a UK-centric business now generates just over one-third of its profits outside the UK. For instance, when RBS bought Citizens Bank in 1988, it was a small US bank primarily focused on Rhode Island. Today, Citizens is a top 10 US bank in its own right. Overall, RBS’s combined US operations now rank it as the seventh-largest US bank, operating in 30 states and generating £1bn in annual profits.

All of this has delivered impressive results for RBS. In 2004, group profits were £8.1bn, 15% higher than 2003, and nearly double the levels in 2000. In less than a decade and a half, the bank has combined rigorous management, successful acquisition integration and strong organic growth to transform its scale, breadth, product capability and geographic diversity.

Justin Malta, financial institutions relationship management, RBS

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