Interactive Investor

More massive losses at Royal Bank of Scotland

26th February 2015 11:30

Lee Wild from interactive investor

Royal Bank of Scotland has surged by more than a third since April last year, and the shares are not far off levels last seen in summer 2011. And that's despite reporting a seventh year of heavy reported losses. But the taxpayer-owned bank still missed City estimates this time, and many in the Square Mile now believe further upside is unlikely.

After losing almost £9 billion in 2013, RBS narrowed the deficit to £3.47 billion last year following a £4 billion write-down on Citizens Financial Group, the US bank it partially floated in New York in September. The entire stake should be gone by the end of 2016.

The core domestic businesses did better though, and there were £1.1 billion of cost savings and significant impairment releases in Ulster Bank and RBS Capital Resolution. It's why RBS turned an operating profit of £3.5 billion for the 12 months compared with a £7.5 billion loss before, although even that misses consensus forecasts by miles. Strip out discontinued operations and RBS made £2.64 billion.

The Common Equity Tier 1 (CET1) ratio, a measure of a bank's capital strength, grew by 2.6 percentage points to 11.2%, and the tangible net asset value (TNAV) per share was little changed from the third quarter at 387p.

Away from the numbers, the big news is a planned restructuring of the underperforming Corporate & Institutional Banking (CIB) division. This will involve exiting 25 of the current 38 countries, and cutting risk-weighted assets (RWAs) by 60% from £107 billion to £35-£40 billion in 2019, including £25 billion this year. Meanwhile, funded assets will drop from £241 billion to as little as £75 billion.

Of course, this is completely necessary, but it will be expensive and revenues will fall much faster than costs. Guidance for 2015 changes, too. RBS now targets 13% CET1, with risk-weighted assets below £300 billion, and aims to cut costs by another £800 million.

However, last year's impairment recoveries at Ulster Bank and RCR are unlikely to be repeated in 2015, the bank warns, and costs settling outstanding conduct and litigation issues "could be substantial".

Investec Securities is not impressed. While conceding there are some "perfectly good 'underlying' divisional performances buried within the overall group numbers" - stable/growing contributions of £607 million from Retail & Business Banking, and £310 million from Commercial Banking in the fourth quarter - the broker thinks it "unrealistic for the market to anticipate/price a materially faster pace of group 'normalisation'".

We expect only a "breakeven" performance in 2015e. Moreover, we do not expect RBS to achieve an RoE >10% before 2019e. As such, without dividend support, and given the continuing overhang of 79% UK Government ownership, we cannot rationalise RBS continuing to trade on >1.0x 2014 tNAV (387p). Consensus expected a £65 million attributable profit in Q4 2014. The attributable loss was £5,791m. SELL reaffirmed.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.