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RBS jumps on DoJ settlement reports

Last year RBS finally returned to profit after a decade of losses, and while it was only a minor profit there was still a sense that the bank may have turned a corner in turning the tide of regular losses.

Not surprisingly the market reaction to the £752m profit was a little underwhelming given that the bank still had to settle its dispute with the US Department of Justice, and had only set aside another £764m in respect of that.

This top up brought the total provision up to $4.4bn, still leaving it well short of what investors feared the total bill might be, with sums of $10bn being mooted in some quarters given previous precedents with respect to other banks.

It is therefore with a sense of relief that this morning’s news that the bank had reached a provisional settlement of $4.9bn has seen the share price surge higher as the prospect of a significant obstacle that had been hanging over the bank looks finally to have been cleared.

Despite this morning’s surge the share price still remains below the highs for this year and still below the 330p level that the UK government sold its first stake back in 2015.

The removal of this cloud of uncertainty also raises the likelihood that the bank may be able to report a profit for this year as well, now that the prospect of additional large scale provisions appears to have been removed.

Since its full year results were published RBS management announced plans to further cut costs with 162 branch closures, in addition to the restructuring plans which were announced in February. These changes are expected to cost about £2.5bn by the end of 2019, as the bank looks to implement the ring fence regime by 1st January 2019.

Today’s news, if confirmed, opens the way to the Chancellor of the Exchequer to look at the plans that he announced in his budget last year to start the disposal process of the government’s 71% stake in the bailed out bank, as early as next year.

There has been speculation that this morning’s news could open the way for the start of dividend payments, which would also be welcome news for the government given its majority stake in the bank.

There will be some criticism that the sale of the stake would incur a loss for the taxpayer but it is also true that any prospect of making a profit from the bailout disappeared long ago. The banks losses over the last ten years are already in the region of £65bn, in addition to the cost of the bailout, which means it was never likely that the stake would ever be sold at a profit.

This doesn’t mean RBS problems are over given the current questionable behaviour at its now defunct Global Restructuring Group, which continue to hang over the bank like a black cloud, particularly given the reluctance of the regulator to sanction the full release of the report into the public domain.

Provision here was left unchanged at £400m in February, though this could come in higher in the coming months. What is more uncertain is the reputational damage which could well be longer lasting, raising the prospect of how you value the potential intangible effects of future lost business this episode is likely to cause in the future.  The rebranding to NatWest of RBS branches in England may well go some way to addressing that particular issue.

On the underlying core business at the end of last year the bank continued to do fairly well, though its net interest margin remains on the low side at 2.04%, despite the recent rise in interest rates, while net income fell short of expectations.


The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.


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