RBS Over Exposed To Private Equity

by Stewart Douglas

Story link: RBS Over Exposed To Private Equity

The Royal Bank of Scotland has come in for criticism today as the most deeply exposed investment institution to any potential private equity crisis, following the credit market turmoil of the summer months which many fear could lead to similar fallout within the private equity market.

Having secured ABN Amro in an acquisition towards the end of last week, the Royal Bank has become exceptionally exposed to the private equity sector, which could ultimately put it in a similar risk bracket as lenders exposed to the sub-prime market.

After a particularly successful first three quarters which saw RBS investment revenues up by just under a third, analysts have highlighted that the bank may be in danger of collapse from over-leveraging in investment assets.

Whilst the core figure ranks the investment division of the Royal Bank of Scotland beyond Goldman Sachs, Credit Suisse, Barclays and Morgan Stanley amongst others, it does give some indication as to the extent of the over exposure of the RBS to the investment sector.

Morgan Stanley came in at the bottom of the table as the least dependent institution on investment banking revenues, with 14% of its fees arising in that sector.  Several of the other major firms saw around 25-28% exposure, which analysts have cited as a more prudent level of reliance in the current market conditions.

The credit crunch environment over the summer has led to significant unrest in finance markets which have seemed to be resting on the edge of catastrophe after over exposure to sub-prime lending lead to a tighter lending sector worldwide.

Many have suggested that in light of the problems, the RBS’s decision to get more heavily involved in investing in ABN Amro has been seen as increasingly risky, with the potential to leave it over exposed to any resulting equity problems.