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RBS - Ninth year of losses

Nicholas Hyett | 24 February 2017 | A A A
RBS - Ninth year of losses

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NatWest Group plc Ord GBP1

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RBS reported a £7bn loss for 2016 (2015: 2bn), largely as a result of massive litigation and conduct costs combined with restructuring and regulatory costs. Underlying operating profits, which exclude one off costs, fell 17% to £3.7bn.

The shares fell 2.1% in morning trading.

Our View

It might not feel like it, but underneath RBS' cratered surface the bank's core businesses are putting in a reasonable performance. The Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets (NWM) divisions generated more than £1bn of profit a quarter this year. Lending in PBB and CPB has been looking better recently too.

Unfortunately, stripping the bank back to those core businesses is proving time consuming and expensive. 2016 is RBS' 9th consecutive year of losses and the group expects 2017 to be the 10th.

Pulling back from far flung outposts has been a large part of the reason for a decade of losses, with Kazakhstan and Russia among the operations on the block this time. Fortunately that wind down is approaching completion, freeing up reserves and bolstering the CET1 ratio, a core measure of a bank's solvency.

More recently the bank has faced a steady flow of fines and compensation claims for mis-selling scandals dating to before the financial crisis. PPI charges finally seem to receding (accounting for £601m of losses this year) but US residential mortgage backed security (RMBS) mis-selling has taken its place. Exactly how big the final bill will be on RMBS remains to be seen.

The other monkey on RBS' back has been Williams & Glyn. The bank was ordered to split W&G out as part of the settlement made with the EU when the bank was rescued. After several false starts, with RBS trying to float the business and sell it to rivals, regulators have finally accepted that a separation is impractical. RBS can now keep the business, but must instead pay money to competitors to help them gain market share. That's expected to cost the bank around £750m, but is at least achievable and should draw a line under the whole sorry saga.

Beyond the less than exceptional exceptionals, RBS' core business is expected to perform reasonably well, with loans growing and costs falling. Record low interest rates may hamper net interest margins (the difference between the price at which it takes in deposits and price it loans out money) but also means bad debts should be low.

Unfortunately a steady operating performance will more than likely be overshadowed by the bank's historic misdemeanours for the time being. It's no surprise to see the bank wrap up its medium term guidance with the warning that "the timing of dividends or buybacks remains uncertain."

Full year results

RBS' 2016 headline numbers are down today following a raft of exceptional items that include; £5.9bn of conduct and litigation costs, £2.1bn of restructuring costs, a £1.2bn payment to the government as part of the dividend access share and £825m of losses on disposals.

The group's core business, Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets (NWM), saw a slight improvement in underlying operating profits which rose to £4.2bn (2015: £4.1bn). Q4 profits rose 61% year on year to £320m.

RBS continues to cut operating expenses, falling £1bn or 11% this year. That's supported an improvement in the bank's adjusted cost:income ratio, a measure of the proportion of income that the group can convert to profit, which fell from 72% to 66%.

The group continues to wind down Capital Resolution, the bad bank, with risk weighted assets (RWAs) falling 30% to £34.5bn. 80% of group wide RWAs now relate to the ongoing PBB, COB and NWM businesses.

The group's capital position (as represented by Common Equity Tier 1, CET1, capital) fell 2.1 percentage points to 13.4%, as losses more than offset the benefits of lower RWAs.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.