RBS has reported a £7 billion loss in 2016, its ninth consecutive year of losses. Since the financial crisis the bank has now racked up £58 billion of losses in total. The bank envisages one more year of cleaning up legacy issues, and expects to return to profit in 2018. From Laith Khalaf, Senior Analyst, Hargreaves Lansdown.
RBS is still paying for the sins of the past, though the bank is now saying that 2017 is going to be its last year in purgatory, and that shareholders can look forward to a brighter, more profitable year in 2018. That may well be the case, there is a decent bank inside RBS struggling to get out, but it’s those “one-off items” which pop up with such alarming regularity which keep pushing the bank deep into the red. In 2016 provisions for litigation in the US relating to mortgage-backed securities was the heaviest weight, costing the bank £3.1 billion. The bank now has a £6.8 billion war chest to cover US litigation costs, but if the bill exceeds that number, RBS will have to put its hand in its pocket again.
The botched Williams & Glyn separation has also been a costly embarrassment for RBS, which spent £700 million in 2016 to spin off the bank, on top of £750 million to fund the new plan, which totally dispenses with the need to hive off Williams & Glyn. Assuming the plan goes ahead, RBS faces further restructuring costs to re-integrate the bank it has been trying to separate from for such a long time. RBS is of course still three quarters owned by the government, and that will remain the case for the foreseeable future, seeing as the share price needs to double for the taxpayer to break even. The bank is certainly making progress, though it has been severely hampered by mopping up the mess left by the financial crisis. There is every reason to believe RBS can be a profitable bank, returned to private hands, the question is how long it will take to get there.
Most of the £7 billion loss can be attributed to the usual one-off items, namely: Litigation and conduct charges of £5.9 billion, of which £3.1 billion is ear-marked to cover litigation in the US, £0.6 billion to cover further PPI claims, and £0.4 billion for poor treatment of small businesses. £2.1 billion of restructuring costs, including £750 billion set aside for the new challenger bank fund which the European competition authorities will discuss as an alternative to spinning off Williams & Glyn. That’s on top of a £0.7 billion restructuring charge taken during the year for spinning off Williams & Glyn.
A £1.2 billion dividend paid to the government which opens the door to dividend payouts to ordinary shareholders… at some point. Stripping out ‘one-off items’, RBS posted an underlying loss of £4.1 billion, down from £2.7 billion last year. The bank’s CET1 ratio, a key measure of financial strength, fell from 15.5 percent at the end of 2015 to 13.4 percent at the end of 2016. There was some good news hidden in today’s numbers- operating expenses fell by £1 billion, and net lending in the personal and business side of the bank rose by 10 percent. Shares fell 2 percent in early morning trading.
