Royal Bank of Scotland abandoned ambitions to be a top global investment bank and said it would cut another 4,450 jobs as it bows to pressure from the UK government to shut down risky operations and prepare for tougher international regulations.
Britain owns 83 percent of Britain's fifth biggest bank after pumping in 46 billion pounds to keep it from going under during the financial crisis and the country's taxpayers are currently sitting on a 24 billion pound loss.
The government has demanded that RBS shrink its investment bank further, despite the bank already halving that part of its business over the last three years.
RBS will now stop trading shares and advising companies on takeovers, both loss-making businesses, in arguably the starkest retreat by a big investment bank as the financial crisis and tough new rules hit profits across the industry.
RBS said it is cutting 3,500 jobs in its investment bank and will exit cash equities, corporate broking, equity capital markets and mergers and acquisitions businesses. The cuts come on top of 2,000 at the investment bank in the second half of 2011 and account for more than a quarter of the unit's staff.
In total the bank has cut 34,000 jobs since Chief Executive Stephen Hester was brought in to turn the bank around when it was bailed out in 2008. The Unite trade union said that 22,000 of those jobs were in the UK alone.
RBS aims to cut the balance sheet of its former global banking and markets business by 120 billion pounds ($184 billion) to 300 billion in the next three years.
Its plan equates to shedding 75 billion pounds in risk-weighted assets and is being mirrored by other banks attempting to become leaner and more focused.
But RBS now faces strong criticism that the cost of the latest overhaul is being borne by the lower ranks of its staff, while Hester and the head of the investment banking operations John Hourican could be in line for multi-million bonus payouts.
Enough is enough. It is a disgrace that while on a daily basis stories are emerging about the massive bonuses at the top of the bank, increasing numbers of jobs are being cut from amongst the hard-working staff, said David Fleming, Unite union national officer.
CEO Hester said in a memo to staff seen by Reuters: This is a part of business I hate; making decisions that adversely affect people. But I truly believe that the best result for the most people can only lie in us making RBS a business success, sustainable for the long-term.
He said without changes, profitability in the bank's wholesale business would be at unacceptable levels.
RBS rose to become one of the world's biggest banks thanks to a string of takeovers and aggressive expansion. But it overstretched and was brought to its knees by the purchase of ABN Amro's investment bank in 2007.
Its new plan will leave its investment bank focused on its areas of strength: fixed income -- notably bond trading, debt capital raising, securitization, risk management and rates -- and foreign exchange.
RBS shares were up 8.6 percent at a two-month high of 23.7 pence by 1220 GMT, leading a 3.7 percent rise by the European bank sector.
The closure of equities has been well flagged, what's more encouraging is the downsizing of the balance sheet. It's taking more risk out of the business, taking more capital dependency and wholesale funding requirements out, said Mike Trippitt, analyst at Oriel Securities.
RBS said it was adapting to significant new pressures in its wholesale banking business, and the changes would make it more conservatively funded, more focused on customers and better able to deliver stable returns.
Analysts at Mediobanca said the bank had been only a second-tier firm in equities and its retreat showed it was the wrong size in an industry that increasingly appears to favor scale or niche players.
RBS separately said it was cutting 950 jobs at its troubled Irish business Ulster Bank to save costs. The losses represent a fifth of its Irish staff and mark a second round of cuts after 1,000 jobs went in 2009.
RBS bought Ulster in 2000 and expanded its Irish operations three years later through the acquisition of building society First Active. It lent aggressively during Ireland's ill-fated property boom and has been saddled with big losses on the loans, including impairments of 1.1 billion pounds in the first nine months of last year.
It said it was in discussions with a number of potential buyers for the businesses to be sold, which had income of about 220 million pounds in the nine months to the end of September, but are currently unprofitable.
Lazard is conducting the sale of the equities units, and Bank of China, Japan's Mizuho Financial and Britain's Oriel Securities are among those casting an eye on them.
Australia and New Zealand Banking group and Commonwealth Bank of Australia are considering bidding for parts of its Australian unit, two sources with knowledge of the issue said on Thursday.
RBS said it will reorganize its wholesale business into markets and international banking, to be led by Hourican.
International banking will include the international parts of global transaction services (GTS), its stable and profitable payments business.
They will target a return on equity in the medium-term above the cost of capital, currently about 12 percent.
($1 = 0.6513 British pounds)
(Additional reporting by Lawrence White and Denny Thomas in Hong Kong and Narayanan Somasundaram in Sydney; Editing by Sophie Walker)