Groundhog Day for RBS

Every year and every quarter we are promised that RBS has turned a corner and every quarter the story is the same, as 8 years from its record bailout the bank has had to report another loss.

Every year and every quarter we are promised that RBS has turned a corner and every quarter the story is the same, as 8 years from its record bailout the bank has had to report another loss.

This morning the bank posted a Q1 loss of £968m, slightly higher than was expected largely as a result of a £1.1bn payment to the UK treasury in respect of a golden share agreement that gave the UK government first dibs on any dividend payments. On the plus side restructuring costs were slightly lower at £238m, and litigation costs were also down to £31m from £856m previously.

The block on dividend payments was put in as a pre-condition of the bailout agreement in 2008 that prevented RBS making pay-outs to shareholders before the government had been repaid.

Even so this isn’t the end of the banks troubles after yesterday’s news that it is likely to miss the deadline of December 2017 to dispose of 300 of its Williams and Glyns branches.

It would appear the logistics of this process are proving more challenging than previously expected and are as a result of EU state aid rules that were the price of being able to implement the 2008 £45bn bailout.

It is estimated that the costs of this ongoing process are also acting as a drag on profits, with current costs already estimated at £1.5bn, with some estimates of £50m a month the longer the process goes on.

Given that the bank is already in the process of having to overhaul and streamline its outdate and complex IT systems due to a number of recent high profile failures it would appear that this is proving to be somewhat of a distraction, and in some ways highlight the absurdity of EU state aid rules which are currently causing so many problems in trying to deal with the problems of the banking sector in Italy, and Europe more broadly.

The process which has been described as akin to unscrambling an omelette is proving to be a significant distraction at a time when banks are cutting costs and closing branches on an ongoing basis. Aside from splitting out the branches, how do you decide what customers and business to push under the Williams and Glyns brand and which ones not to?

There is some good news in that the underlying business did manage to post an operating profit of £421m, but it does appear that the recent market volatility and low interest rate environment that has blighted the performance of its sector peers has also hit its own operating income, with a 13% drop on the year to just over £3bn.

On the retail side, business does appear to be stable with its Ulster Bank subsidiary outperforming with a profit of £64m, while retail and personal banking adjusted operating profit was £531m, down 9% from a year ago, helped by strong growth in mortgage lending.

The big question is whether there is light at the end of the tunnel, and whether RBS has turned the corner, or whether the days of over promising and under delivering are set to continue.

Given the current regulatory environment and a continued era of low interest rates, anyone expecting a speedy turnaround is likely to be waiting a while, however with the shares already near multi year lows expectations are already fairly low, which suggests that the lows of earlier this year at 205p may well be safe for now.

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