RBS forced to sell Citizens ending the most successful UK retail banking foray into US market

British businesses don’t have a great track record in breaking into the US
retail market. You only have to look at the disastrous foray that the Marks
& Spencer acquisition of Brooks Brothers was, Tesco’s humiliating and expensive
attempt with the Fresh & Easy brand and, most recently, the failure of Yo
Sushi! to realise how difficult it is for firms with strong brands in their
domestic markets to make it across the pond.

The retail banking track record is no better with Barclays, Lloyds and
Natwest all quitting the US in the late 1980s and 1990s. Losses from the
acquisition of Crocker drove Midland Bank into the arms of HSBC. Even HSBC has
not been immune to the problem with the disastrous acquisition of subprime
Household continuing to hurt the bank to this day.

It is quite ironic then that RBSG is being forced to exit the one reasonably
successful move into retail and commercial banking that British banks have made
in the US. Whilst Fred Goodwin, the former CEO of RBSG, has been criticised for
much of the way that he ran the global banking group (particularly paying over
the odds for ABN Amro just as the wholesale markets were closing down) his
strategy for building a presence in the US retail and commercial banking sector
should be heralded as one his smarter moves.

Rather than trying to take on the large US retail banks where they were, at
that time, competing aggressively with each other in New York, California,
Texas and Florida, Goodwin decided to build his beachhead in the Mid-Atlantic
by the acquisition of Citizens Financial Group. A series of small but
strategically significant acquisitions followed that expanded it into New
England and the Midwest. Citizens is now the 15th largest commercial
banking organisation in the US. Whilst there have been challenges including
writedowns following the acquisition of Charter One and recent issues with the
way that capital is planned, overall Citizens is a highly capitalised and
profitable bank. Yes its capital is under deployed but that is addressable.
Indeed its reputation with its customers is far better than RBS’ in its own
domestic market.

It is a great shame then for RBSG that due to having to take state
intervention and becoming largely nationalised, primarily due to the
acquisition of ABN Amro and the disastrous business in Ireland, that RBSG is
being forced by the EU to dispose of its ownership of Citizens by the end of
2016.

As the first step of moving towards this in January 2014 Citizens sold off
103 branches in the Chicago area to US Bancorp.

 It has been announced that the next
step will be to float or sell 20-25% of its share of Citizens. A flotation is
more likely as there have been few signs of interest from potential buyers. However
for Canadian, Japanese or Spanish banks that want to significantly grow their
presence particularly in the Midwest and given that it is a forced sale it
could be an interesting opportunity.

The flotation will help to rebuild its balance sheet, but the sale is what
is really needed as that could release more than $3bn of capital, which would
help RBSG reduce the government holding in the bank.

This is all a sad ending to what could have been had RBSG scaled back its ambition
to be global investment bank.

As a footnote, British banks should not give up on being able to build a
presence in the US retail and commercial banking market. RBSG has shown that it
can be done. Barclays is having success with its Barclaycard US operation building
scale to take on the other cards providers, however this is a monoline not a
full service retail banking offering.

The British banks can also look to the Spanish banks, Santander and BBVA
which with respectively the acquisition of Sovereign Bank and Compass Bank, are
demonstrating that it is possible for Europeans banks to build a presence in
the US retail banking market. It takes time, patience and recognition that
whilst both the US and European markets have the words ‘retail banking’ in
their names that they are quite different.

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