Nationalisation of Royal Bank of Scotland

communisation of kinglike banking company of ScotlandPurposeThe purpose of this report is to dispute the change in Royal Bank of Scotland indicated by the companys nationalization in 2008. Shareholders lost the most part of the company in favour of the organisation and way of the bank had to be changed. The purpose volition be fulfil direct by analyzing the process of nationalization and its implications for RBS.Theoretical literature provides a lot of models of change worry and strategic focal point. For example, Ansoff (1987) model suggests four quadrants of scheme. Companies evict grow by penetrating the market and winning larger market share composition competitors share allow shrink. Firms depose as well develop their key products which are their strength and this provide be a scheme for expansion. The third Ansoffs (1987) outline would be to diversify the products and operations to achieve growth. Finally, the company burn choose to pursue market development w hich is entering new geographical areas or new niches that will armed service cave in higher revenue. The case of RBS represents this final model of market development. The banks pursued the new market of mortgage backed securities in the US through acquisition of ABN Amro. This strategy appeared to be unsuccessful and led the bank into a part w here(predicate) accounting way outes reached tremendous value of over 30 one million million pounds in 2008 and led to nationalization of the bank by the UK government. Company OverviewRoyal Bank of Scotland Group plc is a banking corporation with its branch Royal Bank of Scotland (RBS) that is spread around coupled Kingdom with almost 700 sub-branches, located in Scotland, England and Wales and is one of the largest banks in UK. It was founded in 1727 and is the prototypic bank introducing overdraft availability to its clients. Since its foundation, RBS expanded greatly, with big number of acquisition have it aways, such as its ac quisition of NatWest Group in 2000, First Active (Ireland), Charter One (USA) , Churchill Insurance (UK) and ABN Amro (Netherlands) in 2007 (House of leafy vegetable Treasury Committee, 2008). The Royal Bank of Scotland lasting uses a privilege of printing its own banknotes. Until 2009, it was one of the main shareholders of the Bank of China, but had to sell its shares after the global monetary crisis impact. RSB is still in the enumerate of worlds largest banks, being on 6th position in 2003, 10th in 2007 and 19th in 2008 (Financial Ranks Online, 2009). Financial performance of RBS was changing in the last years. In 2005 group direct profit rose by 16%, with total dividend for the year increase by 25%, with capital and earnings increase. During 2006, RBS showed great results and inveterate growth, with increased dividends by 25% with total income growth by 10%. With unstable position in the market and in global financial system, RBS had some(a) worrys, but managers were d iddleing toward subordination of the situation, however growth of the operating profit lessend by 9%, earnings per share by 18% and renovation on equity 19.9%. The company faced big net losses of around 7.9 billion pounds. In the 2009 bank entered heavily clips with reorganization in steering field and in structure. (RBS Annual Report, 2005-2009).Due to changing situation in the global economy, in 2008 Royal Bank of Scotland announced its greatest loss in the banks history with the criterion of 692 million pounds that was connected to unhealthy loans and 71 billion pounds as a result of incorrect deal of acquiring ABN Amro (Bradley, 2009). precedent to the global financial crisis RBS have had great profit margins and was a respected brand with long history. And it is necessary to mention that the bank was at great position in terms of facing crisis, with little impact until the decision of getting ABN Amro, which brought various problems. In 2008-2009 UK citizens were unde r shock of the fact that one of the largest UK banking system representatives had marvelous losses and unpredictable future. At this position RBS had one way to survive seek government harbor. However not all UK banks suffered from consequences of global financial crisis, which butt joint be connected with accurate and carefully planned direction strategy. RBS have got some capital of about 2 billion pounds from selling its share in Bank of China and after giving up part of Linea Directa, a Spanish insurance company for about 4.5 billion pounds. However, it did not help to stupefy a radical change of the situation (Bradley, 2009). agree to Hester, current knob Executive of the RBS Group (2009), great losses of the Group had nothing to do with management of businesses as their performance was profitable. However problems appeared mainly in two divisions worldwide Banking Markets and Asia Retail Commercial Banking. Their profits were crushed by market and credit losses, d eep crush fast changes in the economic conditions. At the same time top managers of the Royal Bank of Scotland were facing risks of acquisition and had limited time to make decisions. Global financial crisis had its impact in different countries, affecting economies and markets especially in terms of exchange rates. Here, decrease in sterling exchange rate had an function on further performance of the bank and changing market position intensified the situation (Hester, 2009). In spite of the fact that financial situation became searing for umteen banks, RBS was still having serious and stable business. Top management was taking steps to recover from crisis consequences, in dedicate to return capital and provide stable ground for future operation such steps included applying to government support. The strategic plan for recovery was supposed to be finished in 2009, slowdown the focus is on long-term customer franchises, quality and profitability. Royal Bank of Scotland can be a n example of the fact that in terms of global financial crisis even big and powerful organisations can face danger. It is the biggest UK company that suffered from the global economic crash. Today it is still far from recovery, having naughtiness loans and loss before tax income in the beginning of 2009 was around 44 million pounds. From the forecasts, 2009 and 2010 will still be challenging for the RBS with main focus on debt returns. Now, after current management revision, directors of RBS are more confident of future recovery and success (The Telegraph, May 2009). New Chief Executive supports the position that management must stay cool and take steps for a slow but effective recovery, rather than fast and wasting strategies in order to save more that to spend (Murchie, 2009). However, gay resource management of the bank is not so confident and planning to neaten around 9000 jobs, which is about 20%. It is believed that this action will help to decrease costs of around 3 billi on dollars (Global Crisis News, 2009). Moreover, RBS represented the worst results in the market, being at the bottom of banking sector in September 2009 (Frei, 2009). Aspects of NationalisationAccording to Encyclopedia Britannica, nationalisation is alteration or assumption of control or ownership of private property by the state (Encyclopedia Britannica, 2009) with several variations in the types and motives. Nationalisation usually appears through assets or shares taken over, and this can help the company to continue its business but under control of the government. If the company is nationalised by government it can continue to produce and operate, getting some revenue and have some returns on shares. Usually this process is followed by structural reorganisation, including traditional administrative strategy and style of control (Backhaus and Wagner, 2004). As a fact, nationalisation can come in the form of expropriation, if the previous owners do not get earnings for the busi ness and in the form of rescue tool or governmental support. Not every company can get such support it is usually a privilege of the companies and corporations that have national importance and heritage. There is a number of examples in the UK history of nationalisation, which helped to reorganise the structure of the company as good as to get financial support (Floud and McCloskey, 1994). It is believed that nationalisation started in the UK in 1908 after the establishment of Port of London Authority with the necessity of production control (Beardshaw and Ross, 2001). Some researches mention proscribe effects of nationalisation, pointing that it can damage economy and banking sector. One of the problems is decreasing competitiveness, especially in banking sector (Lee, 2007). Also, financial institutions and government block participating in management as it can lead to further recalls of nationalisation. And when the company fails to use management as an appropriate tool, the ch ance of mistake gets large with a drift of future nationalisation (Cuthbert and Dobbins, 1980). Mainly, nationalisation has political or economic aspects and motives. When government has power to control specific corporations and their production as sound as financial position, it can use the company as an instrument to correct economy. In addition, government can provide more accurate and efficient capital and assets diversification. If the company is fully nationalised, government becomes the owner of the business and has to deal with its problems and debts. Nationalisation is connected to economy, here in order to have more lovable economy, government trying to stabilise financial system through bad assets escape. There are still debates around the necessity of nationalisation and its problems. On the former(a) hand, there is a view that this process must have temporary term, and government acts more as guardian of the company or bank for the hard period. However, one must c onsider that the process of nationalisation must be done correctly and carefully, with revision of all advantages and disadvantages (Richardson, 2009).Looking at the advantages of the nationalisation first comes its ability to save the company or in our case the bank from heavy and senseless assets, which were collected over the time and are representing thread of bankruptcy. This will include separation such assets from the business allowing operating more efficiently. Unnecessary assets then can be put for sale or managed by some another(prenominal) organisation and the bank, free from problematic sectors can continues to operate. In addition, nationalization can help to restructure top management, getting rid of dilettantish approach of operating the business (Richardson, 2009). RBS is as well as supporting this fact and according to Montia (2009), is now selling some of its asset management business with managed capital of 30 billion pounds. In addition, it is possible that R BS will have to sell more of its business and even at the very low price that is now at the market. It is also a part of the Chief Executives recovery plan for the RBS to separate troubled divisions from working ones with further selling of non-core parts of the business (Bradley, 2009). Without considering the advantage of nationalisation, government can continue to give money support to the banks that are big and strategic for the economy, but this can create the situation, where nothing will be changed and achieved. Government support can give a privilege of a competitive advantage, for example, Federal Rock could cut its prices in mortgages and insurance and attract new customers. Among disadvantages of nationalisation is management problem. In reality it is very difficult to find right and appropriate human capital for each bank in order to manage them properly. static there will be a chance of risks regarding new borrowings, credits and market position. And these risks are now to be taken by the owner. Again the problem of unnecessary assets appears and banks need to get rid of then, basically on very low prices. In this situation market will have clear advantages of nationalisation, while banks will suffer. In addition, nationalisation is very challenging to the government. It must find labor force and money to finance the process. Future performance of the company also depends on who will be in charge could be government itself or another managing company (Richardson, 2009). In order to avoid afterward problems, other options and decisions must be revised before the final decision of nationalisation. The company must stay efficient and respond to the market and global changes in time. charge must stay open and react quickly in order to avoid critical point. Change Process Nationalisation of RBS In the beginning it is important to discuss global economic situation which caused problems in RBS and necessity of taking radical directions, including na tionalisation. UK banking sector was under pressure of economic crisis 2006-2009 and is still recovering. It all started from the US sub-prime mortgage crisis and reached the rest of the world at the beginning of 2007 with increasing debts. Most of all crisis hit banking sector, central banks and international banks worldwide. As a result the Bank of England had to decrease interest rates, and all banks were under risk of failure (Rayner, 2008). Current crisis was named the worst for the last 75 years with negative effects on many types of businesses and customers expectations (Altman, 2009). During this time period management was facing great challenges, especially risk management. In addition, it is obvious from current crisis practice that risk management can help to win the race and using various models and strategies matters (Varma, 2009). Spreading from United Stated over Europe and UK crisis attacked banking sector. UKs economy is connected to the US through trade and loans a nd borrowings. As a result of the go on bankruptcy of banks, some tried to avoid it through help request from government. The first bank that was fully nationalised in UK is Northern Rock, followed by the Lloyds Banking Group with partial control from the government. Some researchers put nationalisation under meaning of rescue, and as a fact not all banks or companies were getting such rescuing package from the UK government. In the case of Northern Rock, decision was made according to the point that this bank is special and its failure can cause growing instability in the UK banking sector (Tomasic, 2008). This also can be true about the Royal Bank of Scotland as it is bank with great history, representing Scots nation as part of Britain, with its own printed banknotes and heritage. In spite of the fact that many banks across the world were put into critical situation, having choices of selling just assets or banks itself, not many were rescued (Woods, Humphrey, Dowd, Liu, 2009). In the report of the House of Commons Treasury Committee (April, 2008) it is discussed that in October 2008 RBS introduced new plan of rescue with capital amount of 20 billion pounds, however, shareholders were getting unattractive returns and government had to rescue RBS through acquisition of major part of its shares. At that time point nationalisation was unavoidable in relation to future life of the RBS. Looking at the managerial problems that caused such consequences it can be pointed that RBSs top management along with its prior Chief Executive, Sir Fred Goodwin was taking over optimistic decisions as well as misunderstanding of the critical situation. Wrong decisions were made due to fast process of the economic decline in quality in UK and globally. According to Hester, RBS was suffering from great downturn due to prior decisions. In addition rail at risk management strategies that were adopted at that time made even worse, in particular control issues. It seems that RB S had a great balance sheet for a long time period and was not ready for immediate change. In 2007, RBS made a crucial decision of taking over ABN Amro bank, in cooperation with Fortis and Santander banks, this resulted in RBSs independence of private organization. Acquisition of the ABN Amro was a wrong step to take in the thread of economic crisis which made RBS unable to finish its strategic plan. Newly formed group was defenseless in the worsening situation of market changes (House of Commons Treasury Committee, 2008). The step of huge expenditure, acquiring ABN Amro in wrong time, could have been avoided by managers of RBS. Even more, loss of around 72 billion Euros intensified critical situation. Managerial decisions of this acquisition were made without disclose of credit and asset problems in ABN Amro prior to the deal. In addition, this decision was influenced by shareholders, here 94.5% of them agreed on acquisition and it may appear that they pressed top management to fi nish the deal. However, RBS directors and top managers agreed about the deal with unanimity. Consequence of this deal is big loss in 2008 of around 30 billion pounds instead of assumed profit. The change associated with acquisition of ABN Amro was a representation of Ansoffs (1987) market development strategy. RBS seek to expand into the US market geographically and in addition the company attempted to profit from dealing with US mortgage backed securities. However, the failure of the strategy caused the banks to suffer losses and request the help from the government which acquired the shares of the business. The process of nationalisation of the RBS began with basic rescue design. In October 2008, RBS started new strategic program in order to increase capital. One of the solutions was to offer ordinary shares at a price of 65.5 pence per share. The offer consisted shares for 15 billion pounds. HM Treasury has got around 12% for 5 billion pounds and later on around 57.9% of shares were acquired by the Government. Decisions that were made by RBS and Government were directed to the achievement of more stable bank position and redundant resources for strength and further capital enlargement. Government and the bank deny that there was a strategy of total nationalisation and when financial position of RBS will be stable, it will again be under private ownership (Webster, 2008). It can be argued that this nationalization is an example of emergent change rather than planned strategy (Whittington, 1993). Emergency was caused by the high dependency of the bank on the inflow of cash for sustaining its operations. Whittington (1993) proposed four basic approaches to strategy. These can be classified as classical, systematic, evolutionary and processual. Classical approach suggests that the companys strategy would be to maximize profit. Evolutionary approach suggests that the environment will select the strongest businesses. The systematic approach suggests that soci al environment will determine business strategy. The change in RBS is processual because it implies that the company consists of different stakeholders who have their own interests and ambitions. The goal of the management is to satisfy the interest of each stakeholder. If RBS was not nationalized and this changed was not made, the society, employees and even shareholders would suffer negative effects. However, it can be argued that the nationalization might have hurt shareholders even more because the value of their equity has gone down as the share price plummeted. cuss Analysis of RBSThe change in the organization connected with the process of nationalization can be reflected in the PEST analysis of the companyPolitical Factors The Ownership of the bank is changed in favour of the UK government Bail out was done out of the UK government budget reinforcing stimulus of the government will have positive effects on financial matters Governments support will cause managers to act in the interests of the government rather than shareholders. economical Factors Interest rates declined so demand for lending can rise Financial Crisis in the UK and the world may further deteriorate performance of the banks and additional capital may be required from the government.Social Factors The change in the bank is also connected with restructuring of the company and lay offs Rising unemployment is a negative consequence of business failures such as RBS.Technological Factors Technologies are constantly improving and this facilitates the banking business of RBS because some costs are being reduced and the work is being optimised However, since the ownership of the company changed from shareholders to the government, management will be rather interested in meeting the objectives of the government rather than optimising the work with new technologies. shoemakers lastRoyal Bank of Scotland is now almost entirely owned by British government around 70%. Today, RBS is among fi rst banks to enter new program named asset protection plan. In 2009 RBS had suffered of worst loss of about 24.1 billion pounds and adopted plan of survival. Some analysts point that as the RBS is not fully nationalised it can still face the risks and fail to satisfy investors expectations. As resent investors rate increased with great returns there is number of requests to have RBS fully nationalised (Werdigier, 2009). It is hard to label whether RBS could have avoid nationalisation in the situation when it is hard to turn back and see other choices. However, there were some managerial mistakes that could have been avoided. suffering change management was not ready to face difficulties and get over them. Besides the acquisition of the ABN Amro that was already discussed, there was another managerial mistake of continuing dividend increase after the change in earnings that were decreasing. Trying to attract new investors with high dividends and please current shareholders, managem ent put the business under risk of failure. After the ABN Amro deal, this, along with unhealthy assets that were not sold in time had lead RBS to the final step of nationalisation. Being attractive for investors and shareholders for a short time period RBS created consequences where investors of the company became most affected by nationalisation. Prior to the crisis RBS was a profitable company with attractive position. Later on there was a decrease of the UK shares market and dramatic drop in RBS share prices. Overall at the point that RBS entered in 2008, nationalisation seems to be the last chance of survival. It can give some extra time to make new strategic plan and to recover from the financial instability. There is still a chance for RBS in the future to become profitable, independent and private company. ReferencesAltman, R.C. 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