The Royal Bank of Scotland (RBS) is one of the
biggest banks in the world. In the 90’s, Sir Fred Goodwin is the chief
executive officer of RBS and he lead RBS to became one of the bank that has
rapid growth among other banks. How did Sir Fred Goodwin do it? Under the lead
of Fred Goodwin, he started by merge and acquisition. In order to make the
financial growth of RBS increase, Fred Goodwin plans to takeover other banks in
the market. First, Fred Goodwin plans to takeover NatWest which is a bank that
is located at United Kingdom. The reason why Fred makes that decision is
because that NatWest Bank has a big building but with a very poor finance
growth and the share price is low as well. After Fred takeover NatWest, RBS
make a large profit over the year and Fred decided to reinvest those profits
into different assets. Well, some people
think that Fred Goodwin is a megalomaniac because he pursues the size more than
shareholder value. Do you agree with that? In my point of view, Sir Fred
Goodwin is overconfidence with the decision that he made. Is taking over other
bank a good way to build up the name of the bank? If yes, why do Sir Fred
Goodwin almost cause RBS collapsed in the end?
In the early 2006, USA has a
property booming where Fred Goodwin thinks that there is a big money could be
made. RBS has merged with a bank in USA which is known as Charter One. By that
time, banks started to make loans like prime and subprime loan to borrowers. By
making loans like subprime lending, the bank can make a lot of money as long as
borrowers repay their loan. However, it is a high risk high return investment
because the bank lend loans to people who might not have enough of ability to repay
back their loan and so the interest rate are high as well. Unfortunately, the
property bubble burst in the late 2006. Many borrowers cannot afford to pay
back their loan and so they stop paying it and declare themselves to
bankruptcy. Banks that do a lot of subprime loan are facing heavy losses as
well and the market is in recession. In this case, RBS is also affected by the
subprime crisis due to the merge with Charter One in USA. I personally think
that merge and acquisition with other banks is benefit to the company. However,
if a bank takeover too many banks, it will cause a burden to itself because it
needs a lot of capital to takeover a bank each time. By that time, RBS had a
press conference to assure to the city that the subprime amount that they do is
very small which will not affect the bank. But, how could a bank manage to grow
well if the economy is in recession condition?
In 2007, RBS plan to takeover a
Dutch Bank known as ABN AMRO. Sir Fred Goodwin thinks that this bank has a good
potential in future because it has many good business, good attractive and good
views. At that time, many risk analyst and investors are disagree with what
Fred plan to do because that think that his decision is insane even after ABN
AMRO announced that they sold off LA SALLE in USA. In my opinion, the reason
why I think Fred Goodwin is overconfidence is because he thought he could make
profit after takeover ABN AMRO like how he takeover NatWest in the past. In
addition of that, I think that Fred Goodwin did not do enough of background
research of ABN AMRO where he should go through the due diligence process
before he decide to take over the bank. Besides that, I think Fred Goodwin had
made a very serious mistake by taking the bank reserves to purchase ABN AMRO.
If a bank runs out of money, it is because that it does not have enough of bank
reserves in the bank. But why Fred Goodwin wanted to make this decision even he
knows the risk of it? In September, subprime crisis is fully spread and the
market went into turmoil. By this time, RBS realised that it is a wrong move to
purchase ABN AMRO because it contained exposure of £100mil of subprime related
investment. In December 2007, RBS announced that they have suffered deep losses
of £1.5 billion. The RBS core equity 1 ratio is getting dangerously low and RBS
force to ask for more cash from shareholders. However, shareholders are angry
with what Fred Goodwin’s decision and they do not trust RBS anymore. RBS
started to run out of option and the cash reserve drained on ABN AMRO followed
by the decrease of share price. By that time, no banks are willing to lend
money to RBS. Lastly, RBS ran out of money and the government has to help RBS
from the deep losses. Therefore, do you think that Sir Fred Goodwin is a smart
CEO? If he could be a bit more careful and concern more about shareholder’s
value then RBS might not have to face such deep losses.
liking this post
ReplyDelete