RBS cuts 3,500 investment banking jobsT)

A branch of the Royal Bank of Scotland is pictured in London, on August 5, 2011.

STORY HIGHLIGHTS

• Royal Bank of Scotland is to cut an additional 3,500 jobs
• It has already announced 2,000 investment banking job cuts as it shrinks its risky operations
• The investment bank will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000

(Financial Times) -- Royal Bank of Scotland is to cut an additional 3,500 jobs as the state-controlled bank rapidly shrinks its investment banking activities in response to the worsening economic outlook and wide ranging reforms of the banking sector due to take effect before the end of the decade.

Stephen Hester, chief executive, on Thursday outlined plans to restructure RBS' wholesaling or investment banking operations into two divisions and withdraw from activities such as cash equity broking and merger and acquisition advisory work that were aggressively expanded by former disgraced chief executive Sir Fred Goodwin.

Risk weighted assets, under Basel III regulatory definitions, will be shrunk to £150bn from £225bn under the restruring plan.

The bank will continue to operate in the fixed income and debt raising markets where it has a strong position but reduce its dependence on wholesale funding markets which have frozen up in the last three years.

Since taking over in 2009, Mr Hester has shrunk RBS's balance sheet by £600bn following the disastrous acquisition of Dutch bank ABN Amro in 2008 by Sir Fred, which forced the bank to seek a government bail-out.

It has already announced 2,000 investment banking job cuts as part of Mr Hester's attempts to shrink the highly profitable but risky operations and focus on lending to corporate and institutional clients.

The investment bank, which will be restructured into a markets division and an international banking unit, will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000.

However, people close to the bank have said that the staff numbers could fall to below below 10,000 in a worse case scenario.

The two business units will target a return on allocated equity exceeding the cost of capital, currently estimated at 12 per cent, in the medium term.

The unprofitable cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses will be closed or sold.

"Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall," Mr Hester said in a statement.

The investment bank has been RBS's growth engine in the last three years, producing an average return on equity of 19 per cent, but Mr Hester made clear on Thursday the bank had to respond to the challenges thrown up by the current economic crisis.

But pressure mounted on the bank just before Christmas, when George Osborne, chancellor, said the bank, which is 83 per cent-owned by the government, should "scale back [its] risky activities".

The government has also accepted proposals from the Vickers commission, which was set up following the financial crisis and recommended splitting investment banking activities and retail banking operations in the UK's leading banks by 2019.

Shares in RBS were 9 per cent higher at 23.75p in morning London trading.