NatWest Group Plc had for decades bought European sovereign debt and distributed it across markets. That was until Thursday, when the bank said it would only do that for the UK government, pulling back from US and European markets and cutting a number of traders.
The bank’s efforts in those products have been dwindling in recent years. It’s taken up a smaller allocation of French and German bonds. Revenue has shrunk, too: Rates alone generated £326 million ($431 million) of income for NatWest Markets in the first half of 2019, while fixed income overall reported £52 million in the same period of this year.
The move closes one of the last remnants of NatWest’s once formidable European footprint when — as the Royal Bank of Scotland — it was one of the world’s largest banks. Before RBS’s collapse during the global financial crisis, it was the top-ranked primary dealer for French bonds.
Now, with its long recovery and relegation to a domestic UK lender mostly complete, it’s committing to local bonds while scaling back in the rest of the market.
“Being more focused on the UK market makes a lot of sense,” said Berenberg analyst Michael Christodoulou. “You are just getting more UK exposure and in the grand scheme of things you would see NatWest as more of a retail bank than anything else.”
But without a broader presence in the primary market for government bonds, clients may be less likely to bring business to NatWest as the bank loses visibility into new sales.
NatWest is also condensing its markets business, combining its fixed income unit with its private financing business, under the leadership of Stuart Connell who led the latter, according to a person with knowledge of the matter, who asked not to be identified discussing private information. The bulk of NatWest Markets’ earnings come from corporate lending, making up for lackluster results in its European government bond business.
“Following a review of our markets business, we are simplifying our structure and proposing to withdraw from European and US primary dealership programs,” a spokesperson for NatWest said in an emailed statement on Saturday. “The US and Europe remain important markets for NatWest, and these changes will allow us to focus resources on areas where we can deliver the greatest value for customers and support future growth.”
NatWest has been authorized by France and Germany to buy their sovereign debt for more than 20 years, when it was known as the Royal Bank of Scotland. But its prominence in those markets has diminished. In 2019, NatWest was the sixth most active primary dealer of French bonds, and it hasn’t made the top 10 since then.
In Germany, NatWest was the fifth most active firm in bund issuance last year, just behind Deutsche Bank AG. In the first six months of this year, NatWest ranked ninth .
Around 10 traders at NatWest were notified on Thursday that their positions had been cut, according to people with knowledge of the matter. Some were offered the opportunity to take other roles within the bank, though some declined, said the people, who asked not to be identified discussing private information.
NatWest remains competitive in UK markets. It was appointed as one of the lead bookrunners for Scotland’s planned first sale of bonds, known as kilts. It also was appointed to spearhead the UK’s first digital bond pilot. It has, however, suffered departures from its gilt trading business in recent months, including the team’s head Vishal Sheth, who left in July.
“It’s indicative of how focused NatWest is now becoming on the UK,” said Edward Firth, a UK banking analyst at Keefe Bruyette & Woods. “You also wonder why it’s possibly taken so long; they started closing the investment bank years ago and they are only just stopping being a primary dealer in US bonds.”