LONDON Royal Bank of Scotland (RBS)(RBS.L) will shrink investment banking operations drastically, pulling out of 25 countries across Europe, Asia and the Middle East and allowing the state-controlled lender to refocus on lending in Britain.
RBS is seven years into an unprecedented corporate diet, shedding more than 1 trillion pounds ($1.54 trillion) in assets as it retreats from the acquisitions that once made it the largest bank in the world and an enormous financial burden for British taxpayers when the credit bubble burst in 2008.
The bank reported a 2014 loss of 3.5 billion pounds on Thursday, hit by a writedown on the value of its U.S. business Citizens and new charges relating to foreign exchange investigations and mis-selling.
RBS, 79 percent owned by the British government, remains hampered by a number of investigations into past misconduct, which threaten to undermine its turnaround under Chief Executive Ross McEwan.
It said on Thursday that three staff were dismissed in recent days as part of its inquiry into failings at its foreign exchange business and German authorities are looking at whether its Swiss private bank helped some clients to evade tax.
"If we find anything that has evidence of wrongdoing we will come down incredibly hard," McEwan told reporters.
RBS has previously said that its Coutts International business, which is up for sale, was the subject of a tax evasion investigation by U.S. authorities but it warned of the attention from German authorities for the first time on Thursday.
The bank launched an internal probe into its foreign exchange trading practices last year after it was one of six banks fined a combined $4.3 billion for failing to stop traders trying to manipulate currency markets.
"Where people have done things wrong we want to hold them accountable," McEwan said.
Last year's loss was a big improvement on the 9 billion pound deficit chalked up in 2013, but RBS has not turned an annual profit since the financial crisis. It has lost 49.5 billion pounds over that period, more than the 45 billion pounds taxpayers paid to bail it out in 2008.
Shares in RBS were down 4.1 percent at Thursday's close, compared with a 1.2 percent rise in the European banking index .SX7P.
INVESTMENT BANKING RETREAT
To bolster capital and generate better returns, McEwan said the investment banking division would reduce its presence in Asia significantly and withdraw from central and eastern Europe, Africa and the Middle East, cutting swathes of jobs and 60 percent of assets.
"Let me be quite clear this marks the end of the standalone global investment bank model for RBS," he said.
Finance director Ewen Stevenson told reporters that more than half of jobs will go at the bank's U.S. trading business, which employs about 2,000 staff, mainly in Connecticut.
Rory Cullinan, RBS's highly regarded restructuring chief, will be made chairman of the corporate and institutional (CIB) division to oversee the retrenchment.
Cutting back on expensive investment banking activities will reduce the capital RBS has to set aside, raising its capacity to potentially return some money to shareholders.
The bank said that by next year it hopes to be able to start discussions with Britain's Prudential Regulatory Authority (PRA) about resuming dividends.
For those talks to happen, Stevenson said the bank would need to be past the peak of litigation costs associated with a U.S. investigation into the sale of mortgage-based bonds, which he said is likely to happen this year.
"We need to have confidence and sustainable profitability at that point, which we believe we'll have," Stevenson said.
A poster child for what went wrong in British banking, RBS is under pressure to focus on lending to local businesses and consumers and to ensure that it does not return to the swashbuckling, big bonus days of the past.
In a letter to Howard Davies, confirmed on Thursday as the new chairman of RBS, Britain's chancellor spelled out what he wants.
"I look to you and Ross McEwan personally to ensure that the entirety of the bank’s business is conducted to the very highest ethical standards," George Osborne wrote.
"My priorities for RBS are these: it is a British bank focused on the British economy, with lower bonuses and with a plan to get the taxpayers’ money back."
(This version of the story filed to correct typographical error in 14th paragraph)
(Writing by Carmel Crimmins; Editing by Keith Weir and David Goodman)