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Brexit turmoil awaits Alison Rose, tipped to become RBS' new chief

Alison Rose, tipped to become Royal Bank of Scotland Group PLC's new CEO, will face Brexit turmoil and a host of tail risks including the potential breakaway of Scotland from the rest of the U.K. if she steps into the top job.

Sky News reported Aug. 10 that Edinburgh-based RBS is set to appoint Rose as CEO, replacing Ross McEwan. That would make the current head of RBS' commercial and private banking business the first female CEO of a major U.K. bank.

McEwan resigned in April but will stay in place until a successor has been appointed. He is understood to have accepted a role as CEO of National Australia Bank Ltd.

Rose had been widely seen as the most likely candidate for the top job at RBS, according to Joseph Dickerson, a banks analyst at investment bank Jefferies.

"She's a company insider and is seen as a safe pair of hands," he said in an interview.

Rose is a highly credible candidate thanks to her experience running RBS' commercial business, according to another London-based banks analyst, speaking on the condition of anonymity.

"She has always been seen as a front runner, so it would not be a surprise if she is indeed appointed," the analyst said in an interview. "Rose hasn't been exposed to the full glare of publicity that comes with the CEO role, so it will be a big step up, but she's a credible candidate who has done a decent job under extremely challenging conditions."

Things could get ugly

That said, she would face "many and various" challenges were she to step into the CEO role, the analyst said.

"In the short term, she [would be] stepping into the role at a very difficult time. Brexit is blowing up at exactly the same time she would be taking over from McEwan," he said.

The U.K. is scheduled to leave the EU on Oct. 31, although the exact terms of the deal have yet to be negotiated, and a "hard" Brexit remains a distinct possibility.

RBS' geographic focus on the U.K. means that it is highly exposed to potential fallout from a damaging Brexit, the analyst said. In particular, its focus on lending to small and medium-sized enterprises could prove a vulnerable spot, he said.

"RBS is a market leader in SME lending, at a time when SMEs are looking like the soft underbelly of the British economy," he said. "The fourth quarter could be quite ugly for RBS."

The bank's SME and mid-sized corporate loan book stood at £30.6 billion as of the end of the first half of 2019, a 2% increase compared with the same period in 2018. The bank's total commercial loan book totaled £102.6 billion at the end of the first half, while the U.K. personal banking loan book stood at £153.1 billion.

Jefferies' Dickerson said getting the British government off the bank's shareholder register would be a top priority for a new CEO, and that Brexit would complicate that.

The government still owns a 62% share in RBS after bailing out the bank during the 2008-2009 financial crisis. The Office for Budget Responsibility, a government department, said in late 2018 that the government planned to sell its entire stake by 2024.

Market uncertainty caused by Brexit has already slowed down government plans to exit RBS and could continue to do so, Dickerson said.

Scottish independence

In addition to Brexit, RBS faces a tail risk of Scotland breaking away from the rest of the U.K., the unnamed analyst said. This could be highly disruptive for the bank, which has a significant proportion of its business in Scotland, he added.

McEwan said earlier in August that the Edinburgh-based bank would move its headquarters to London if Scotland became independent, as it would be "too big" for the Scottish economy.

Another risk is a Labour government taking power in the future, as the party has signaled that it might re-nationalize RBS if it got into power, the analyst noted.

While neither a Labour government nor Scottish independence are likely to happen at any time in the near future, they are still "unhelpful" tail risks hanging over the RBS stock, he added.

The process for selecting a CEO is still ongoing, and McEwan's successor will be named "in due course," a spokesperson for RBS told S&P Global Market Intelligence.

RBS shares closed down 1.76% on Aug. 12.