RBS plans to cut costs by $2.5bn as losses mount

Bloomberg

Royal Bank of Scotland Group Plc, Britain’s largest taxpayer-owned bank, laid out a plan to cut costs by 2 billion pounds ($2.5 billion) over the next four years as it posted its ninth straight annual loss and delayed profitability targets.
The net loss widened to 6.96 billion pounds in 2016 from 1.98 billion pounds a year earlier, the Edinburgh-based lender said in a statement. Excluding conduct charges and restructuring costs, operating profit was 3.67 billion pounds, topping the 3.1 billion-pound average estimate of seven analysts compiled by Bloomberg News.
RBS expects to report its first profit in a decade in 2018, having accumulated more than 58 billion pounds of losses over the past nine years. Chief Executive Officer Ross McEwan remains mired in past scandals as he tries to draw a line under surging charges tied to regulatory probes and the aborted sale of the bank’s Williams & Glyn consumer unit.
“RBS remains the ‘jam tomorrow’ bank after revealing another set of ugly numbers,” Richard Hunter, head of research at Wilson King Investment Management said by e-mail. “The long and winding road towards the resumption of the dividend is still some way off and the government stake continues to cast a long shadow.”
The bank’s shares fell 2.7 percent to 242.6 pence in London. The stock had climbed 11 percent this year, after dropping 26 percent in 2016.
Williams & Glyn
It was a foregone conclusion that RBS would post its third-largest loss in the past decade, after it set aside 3.8 billion pounds in recent weeks for a U.S. investigation into mortgage-backed securities, while pledging to boost competitors in the U.K. commercial banking market instead of selling Williams & Glyn to meet European Union demands tied to its taxpayer bailout.
The European Commission probably won’t provide RBS with a view on the proposed alternative plan until at least the fourth quarter of this year, Chief Financial Officer Ewen Stevenson said on a call with reporters. That will then be followed by a “fairly lengthy renegotiation of the state aid agreement.”
McEwan is pushing to eliminate operating expenses as he shrinks RBS, a one-time global titan with more than 2 trillion pounds in assets, to a domestic retail and commercial lender. He’s redoubling his efforts after his plan to lower the bank’s cost-to-income ratio, a key measure of profitability, to below 50 percent was blown off-course after the Bank of England cut interest rates last year.
RBS said it now aimed to reach its cost targets and a 12 percent return on tangible equity in 2020, one year later than planned. The bank said it would face another 1 billion pounds of restructuring charges this year, apart from additional costs tied to its plan to meet state aid obligations. RBS also expects 2017 to include most of the 800 million pounds of losses it anticipates to come from disposing of unwanted assets.
McEwan said the bank would eliminate jobs as part the 2 billion pounds of cost-cuts, without giving specific numbers for role reductions. RBS has cut staff numbers from about 170,000 employees to just under 80,000 over the past decade through redundancies and selling operations such as Citizens Financial Group Inc., a U.S. consumer bank. The company plans to remove 750 million pounds of expenses in 2017 after removing 985 million pounds of costs in the
period a year earlier, more than
expected.
“There will be job losses that we have to go through,” McEwan said on the call with reporters. RBS will cut operating expenses by removing “people, property, lower technology costs in some areas. It will be across the board.”

Core Business
Although RBS remains unprofitable due to legacy misconduct charges and restructuring costs, the lender said it generated more than 1 billion pounds of profit for its eighth consecutive quarter when excluding those items. Pretax profit at the UK personal and business banking unit, the lender’s largest division, rose 1.5 percent to 2.2 billion pounds for the year.
“There is, we think, a perfectly respectable ‘underlying’ business performance buried under all this,” Ian Gordon, an analyst at Investec Bank Plc with a sell rating on shares, wrote in a note to clients. “But we do not expect it to start to emerge before 2018, nor translate into anything akin to ‘normal’ profitability before 2020.”
Full-year adjusted revenue fell 5 percent to 12.4 billion pounds. Operating costs aside from the legal and restructuring charges dropped 12 percent to 8.22 billion pounds. The lender’s investment bank unit swung to a 201 million-pound adjusted profit for 2016, after a loss a year
earlier.

Dividends
The firm’s core Tier 1 capital ratio, a measure of financial strength, fell to 13.4 percent from 15 percent at the end of September. The bank said it plans to have a ratio of at least 13 percent at the end of this year, and plans to cut 20 billion pounds of risk-weighted assets from its core businesses by the end of 2018 to boost capital.
McEwan has previously pledged to return capital to investors through dividends or share buybacks above 13 percent.
Still, the bank faces uncertainty on its capital position from penalties tied to the U.S. Department of Justice’s probe into sales of mortgage-backed securities probe, as well as costs to overhaul the bank.
“We worry that further litigation and restructuring charges may continue to erode the book value and capital position going forward,” Andrew Coombs, an analyst at Citigroup Inc. wrote in a note to clients.