RBS to Vend Derivative Biz

Zacks

The Royal Bank of Scotland Group plc (RBS) is in negotiation to divest its structured retail investor products and equity derivatives operations to Paris-based BNP Paribas SA (BNPQY). The company will expectedly announce the sale this week itself.

The move is part of Royal Bank of Scotland’s strategy announced last June to reduce its equity sales and trading operations. However, the winding down of these operations will result in 2,000 job cuts by the end of 2014.The British bank was forced to trim its investment bank’s portfolio due to regulatory pressure and consequently focus on domestic and business lending after it was bailed out by the British government during the financial crisis.

In compliance with the orders of regulators, Royal Bank of Scotland has already sold its stake in Global Merchant Services (WorldPay) and RBS Sempra Commodities. It has also initiated the spin-off of the insurance business as the Direct Line Group through an IPO. Further, in September, the British bank sold some of its branches to Corsair Capital and Centerbridge, both of which are private equity firms.

French lender, BNP Paribas, is the most eager to purchase the equity derivatives portfolio in an attempt to strengthen the dwindling market for such products. The sluggish economic environment and increasing regulatory expenses related to such products have recently caused many banks to wind down their derivatives portfolios.

Last month, BNP Paribas inked a deal with Credit Agricole’s investment banking unit, while last year, it signed an agreement with Sydney-based Macquarie Group related to notional portfolio.

Though Royal Bank of Scotland is yet to tide over its troubles, we commend the efforts to restructure its business. Presently, the British bank remains 81% owned by the taxpayers and any private ownership in the near future seems unlikely. However, with the divestment of its non-profitable units, we believe that the bank will be able to reinstate its former glory.

Royal Bank of Scotland currently carries a Zacks Rank #4 (Sell). Some better performing foreign banks include Australia & New Zealand Banking Group Limited (ANZBY) and DBS Group Holdings Limited (DBSDY). Both these stocks have a Zacks Rank #1 (Strong Buy).

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