Alison Rose will take over at Royal Bank of Scotland Group PLC on the day after Brexit is due with a focus on cutting costs, returning capital to shareholders and finally taking the bank out of state control.
She has long been groomed for the role and her appointment was expected after a leak suggesting as much in August. RBS' shares bounced a little, up by 1.6% to 211 pence in mid-morning trading. But analyst Ian Gordon at Investec said this was part of a sector bounce rather than specific to Rose.
"Her appointment was very much expected and I think she will be viewed as the continuity candidate for the bank," he said in an interview.
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"RBS has some challenges on revenue numbers so she will continue to focus on costs — the bank has indicated the 12% return on equity target is out of reach, for instance."
The lender indicated at its first-half results that it no longer expects to receive a 12% ROE and less than 50% cost to income ratio in 2020.
Mortgage performance
Low interest rates and a highly competitive mortgage market have cut banks' net interest margins but RBS has indicated that it is performing well in the mortgage market.
Les Matheson, RBS' personal banking CEO, recently told analysts at Jefferies that the volume of mortgage applications had been exceptionally strong in recent weeks.
"Matheson said that the 'mortgage market is surprisingly buoyant' and that the bank has seen the best three weeks of mortgage applications almost ever," said Jefferies analysts in a note.
The bank has been aided by the departure from the mortgage market of challengers such as Tesco Personal Finance PLC, which is selling its mortgage book to Lloyds Banking Group PLC. Although Jefferies noted that even if volumes remain strong, there has been no let up in pricing pressure.
There are areas where Rose could cut costs, however, said Jefferies' analysts, citing the bank's NatWest Markets PLC arm and other costs associated with Brexit and ring-fencing (the process whereby banks were obliged to separate their retail banks from their investment banking arm).
"Whilst management remain cautious on the income outlook, they indicate there are still opportunities on costs — for instance, in NatWest Markets the ratio of back to front staff is 4:1 and also up to £100m of annual costs associated with Brexit and ring-fencing," said Jefferies.
Legacy of financial crisis and Brexit vulnerabilities
RBS is still dealing with the legacy of its central role it played in the financial crisis when it received a £45 billion government bailout. It remains majority state-owned, with the government holding a 62% stake, and one of Rose's priorities will be getting the bank back into private ownership.
RBS can now buy back up to 4.99% of that every 12 months, if the government is prepared to sell. The shares remain well below the average price of just over £5 a share originally paid by the government. The Office of Budget Responsibility has said the government intends to sell it entire stake by 2024, though the market uncertainty caused by Brexit has already delayed that process.
Brexit, of course, looms large over the British banking sector and RBS' concentration in the U.K. means it could be especially vulnerable to any resulting downturn, as S&P Global Ratings highlighted in a recent report.
"U.K. banks with more limited international diversification have tended to experience larger revenue declines. Santander U.K. and RBS both saw pronounced falls in operating revenues of around 8% in first-half 2019 compared with first-half 2018," it said.
While larger firms in the U.K., especially banks, have indicated they are well-prepared for Brexit, the picture is less rosy for smaller companies. RBS is heavily exposed to smaller firms; indeed it is the market leader in lending to small and medium-sized enterprises.
The bank's SME and midsized 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.
RBS reported its first annual profit in a decade in 2017 and the bank is still committed to capital returns, said Jefferies, with special dividends likely to be the preferred option.
"There is still a sense of urgency around capital return (i.e. taking the first half 16.0% CET1 down to 14% over the next two years). All options are on the table including buying back shares in the open market but this is not seen as optimal. Thus, it seems that special dividends remain the preferred option," Jefferies said.

