Today's results suggest RBS may indeed need to make 4,000 redundancies in its investment bank. Also, it has accrued no bonuses

RBS likes to hearken back to the worst of times. Its investor releases are prefaced with references to the bad old days when its cost income ratio was 97% and its return on equity was -31%. 'Look how we've improved,' is the implication.

RBS's Q3 results suggest the Global Banking and Markets division (GBM) has not improved enough, however. Nor, according to the pessimistic outlook of Stephen Hester, is it likely to improve in the near future.

In the third quarter, profits in GBM, RBS's investment banking business, fell 81% year-on-year to just 112m. The cost income ratio in the division rose to 93%.

This is not good for a bank which, as recently as August was extolling the virtues of a cost income ratio of 55% across all divisions.

Attempts have been made to stem the pain. Hester said today that no bonuses at all were accrued in the third quarter and that it may yet be necessary to reduce some of the bonus accruals from earlier in the year.

Nevertheless, costs at the bank are looking sticky. Compensation per head, at 106k for the first nine months, is only marginally lower than the 110k RBS paid last year. Mention was made of the lag effect that deferred bonuses are having on compensation costs: costs can be reduced now, but last year's deferrals must still be paid. The effect of this year's lower deferrals won't be felt immediately.

In the circumstances, and at revenue levels seen in the third quarter, Hester said the cost issue is "structural" rather than simply bonus related. Redundancies must be made.

The bank made no mention of the extent of these redundancies, merely saying that they are coming and more detail will be given with the end of year results. However, it's worth recalling the Sunday Times story a few weeks ago claiming RBS was drawing up plans to cut 5,000 of its GBM professionals. If RBS does indeed want to reduce its GBM cost/income ratio to 55% and thinks Q3 revenues are a long term reality (which Hester implied may be the case), headcount cuts nearing this magnitude could be necessary.

Much will depend upon the flexibility of non-staff costs. In the third quarter, non-staff related expenses totaled 492m, or 45% of the total. To achieve a GBM cost/income ratio of 55%, RBS will need to reduce costs in the business by 415m. If these cuts fall entirely upon staff - currently paid an average of 141k a year - they will imply a headcount reduction of 4,000 - 21% of the GBM total.

Some redundancies have already been made. Headcount in GBM is down by 600 people compared to the third quarter of 2010. Headhunters say RBS's structured products professionals are expected to be particularly targeted for redundancies in the weeks to come. The bank is said to have retained an unusually large structured products team since acquiring ABN AMRO. This may now be slashed by a third - or more.