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from Breakingviews:

RBS has tough fight to put value in wholesale arm

By Margaret Doyle

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Royal Bank of Scotland, the state-owned UK lender, is cutting its investment bank, again, and is merging it with its international payments unit. The new division aims to make more than the 12 percent groupwide cost of capital. It must do at least that to have any value. But it is a big ask given regulatory and political headwinds.

The cash equities business was never a strength for RBS - not even after the purchase of Hoare Govett which came with the disastrous ABN Amro acquisition of 2007. The fixed income business is stronger. Indeed Greenwich Capital Markets, acquired with NatWest, is something of a jewel in what is otherwise a pretty tarnished crown. Helped by Greenwich, America contributes the largest share of RBS’ investment bank revenues, almost one-third of the total. It also earned a healthy 24 percent return on equity in 2010.

Sadly, the strengths are shrinking. Greenwich was a big player in now-diminished U.S. mortgage trading and returns will come under further pressure because Basel regulations require RBS to assign more capital to fixed income. Moreover, new UK rules that will ring-fence retail banks from riskier wholesale arms raises the latter’s cost of funding. Analysts at Credit Suisse forecast that, without restructuring, return on equity at the investment bank would have shrunk to 6 percent.

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In the blink of an eye it look as if the City is “booming” again after Barclays and HSBC announced buoyant investment banking earnings on Monday.

Both banks were hit by a surge in bad debts as the recession took its toll on borrowers, but analysts said that resurgent debt and foreign exchange trading and market share grabbed from troubled rivals fuelled the largely positive results.