The Royal Bank of Scotland (RBS) Group SWOT and PESTLE Analysis

Strengths

1. Systemic Importance to the UK's Economy Ensures Government's Support in Distress: Systemic importance of RBS to the UK's financial services industry can't be overemphasized. In December 2016, HM Treasury holdings in the RBS ordinary shares were 71.3%. If RBS were not a systemically important entity then the UK Government wouldn't have bolstered the group's capital resources.

2. Dominant Position in the UK Corporate and Commercial Banking Market: The group ranks as number one in a wide range of segments including UK payments, deposits, lending, asset finance, invoice finance and foreign exchange. In terms of retail banking in the UK, the group retains a very strong franchise operating under its RBS and NatWest brands. The group's domestic market share confers it a major competitive strength as the group still derives more than 90% of its revenue from the domestic market.

3. Improving Risk profile due to decline in reliance on Wholesale Funding: The group has been constantly reducing its reliance on volatile wholesale funding. The balance sheet has been reduced by over £700 billion from its peak. Also, RBS de-risked the balance sheet by reducing its Risk Weighted Assets (RWA) to £228.2 billion in FY2016 from £385 billion in FY2013. Altogether improved CET1 ratio and declined wholesale funding improved the group’s risk profile.

Weaknesses

1. Litigation and Conduct Charges Impacting Operations: The group has been facing increasing litigation and conduct charges for the past few years. For instance, it has been facing charges related to, misleading statements in connection with the rights issue announced in 2008, LIBOR rigging in 2014, credit default swap antitrust litigation, FX antitrust litigation, US Treasury securities antitrust litigation, interest rate swaps antitrust litigation, CPDO litigation and Interest rate hedging products litigation. As a result, the group’s reputation was impacted and its profitability was impacted.

2. Restrictions on Dividend Payments: It has been 10 years since RBS has paid dividends to its shareholders. Even though it has returned to profit in the first quarter of the year the issues related to its commitment to EU competition chiefs regarding of closing of 300 branches and cases related to settlement with US authorities is met it will not be able to pay the dividends.

3. Inability to Spin Off Williams & Glyn: The group could not succeed in spinning off Williams & Glyn into a separate company. Since Santander pulled out of the deal to acquire the RBS branches in 2012, RBS has been working hard and investing heavily in carving out Williams & Glyn as an independent bank with the aim of floating it. RBS has, however, decided that a standalone Williams & Glyn would not be robust enough to survive in what has become a very harsh UK banking environment Moreover, if the group is unable to sell Williams & Glyn by the end of 2017 then it will have to incur further charges and strategic limitations.

Political

1. Changing Rules and regulations: 2016 was a challenging political environment for RBS, characterized by new regulatory capital rules from the EU forcing banks to ring fence core operations as well as the introduction of a new 8 percent surcharge on bank profits in January 2016 by the UK government. This surcharge is especially more taxing for banks with an overseas subsidiary, thus contributing to the major decision to divest many RBS overseas operations including Citizens in the US.

2. Government's Competition Review Findings Could Have an Adverse Impact: Following the 2008 financial crisis, the EU Basel committee came up with new capital requirements collectively known as Basel III. Beginning 2015, new Basel III capital requirements following the original Basel II rules require banks to fund themselves with 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets. A minimum Common Equity Tier 1 ratio of 4.5% must now be maintained at all times by banks by 2019.

3. Brexit Uncertainty: However, the biggest political shock was Brexit when in June 2016, Britain voted to leave the EU. For RBS, the continued demand for another Scottish referendum in opposition to Brexit is a potential threat and if successful could force the bank to move its Edinburgh headquarters to London. The effect of Brexit has a possible negative consequence for RBS with its capital, operations and regulation all getting impacted.

Economic

1. Profitability hampered by low interest rate environment: The short-term effect of Brexit within the wider economic environment which did impact RBS operations was a low interest rate environment. The Bank of England reduced the base rate from 0.5% to an even lower 0.25% in August 2016 following Brexit. The profitability is a challenge for the banks due to the prevailing low interest rate environment. On top of this, the UK economy grew by 2% in 2016 which was a little slower than the previous year (Annual Report 2016).

Social

1. Ageing population in UK: The ageing population in its core market of UK mean shift towards savings, investment and wealth management offers as baseline service to meet the needs of pension age customers. The social environment includes changes in demographics, lifestyles or changes in fashion, labor and social mobility. These social changes can be both threat and opportunity for the RBS. According to the Office for National Statistics (ONS), the UK median age has over the last 40 years increased from 33 years in 1974 to 40 years in 2014 (ONS 2015). There is forecast of double digit growth in 55-64-year olds by 2019.An ageing population comes with business opportunities for RBS as pension age consumers have more incomes and earn higher disposable incomes. For RBS, such a shift means a drive towards savings, investment and wealth management as a baseline service to meet the needs of pension age customers.