The sale of the Government’s stake in bank looks further away than ever
Last Monday’s board meeting was meant to be about the future.
Three months after the start of his tenure as chief executive of the Royal Bank of Scotland, Ross McEwan was due to unveil the key points of his proposed strategy review to his fellow board members. But instead, the two-hour meeting was filled by the past.
“Fronting up to our past mistakes is very expensive,” McEwan told his colleagues, a comment he echoed a few hours later on a conference call after a series of galling write-downs and provisions had been announced.
In total, RBS (LSE: RBS.L - news) announced £3.1bn of new provisions to cover pending US litigation charges, payment protection insurance and interest rate swaps costs plus £4bn to £4.5bn of losses flowing from the creation of the bank’s new internal “bad bank”.
Analysts were quick to grab the calculator, and point out that RBS will book losses in the region of £8bn for the 2013 financial year. Those who thought the worst was behind it, thought wrong.
Monday’s announcement may not have taken weary investors by surprise its share price ended the week not far off where it started but it has certainly affected wider sentiment towards the state-backed bank.
Many in the Square Mile and Westminster appeared to think that the forced exit of McEwan’s predecessor, Stephen Hester, in June last year meant that RBS was at the start of a new chapter.
With Hester gone, the Chancellor used his Mansion House speech to announce a report to back up his desire to create a “bad bank” which would let the good bank flourish and the Government’s 80pc stake begin to be sold down.
Only that hasn’t happened. The bad bank is being created, hence the losses. But the “good” part is far from clean, as Monday showed.
McEwan is now in a position where he and his management team joining him in not taking a bonus for 2014 is paying for the sins of the past with no clarity as to when he will stop.
What was noticeable from what McEwan and Nathan Bostock, his soon-to-depart finance director, said on Monday was that there may be more bad news to come.
The provisions made so far stem from RBS’s ability to crystallise the losses from an accounting standpoint. The securities litigation in the US to which £1.9bn of the £3.1bn relates is not complete. The figure is an estimate, based on settlements by other banks.
Analysts also question the scale of provisioning for RBS’s interest rate swaps book. Although Bostock says the figure reflects the fact that its swaps were relatively plain compared with those of its rivals, question marks still exist. What do all these provisions and losses do to the bank’s capital position?
At the end of 2013, its fully loaded Basel III core tier one capital one ratio was 8.1pc-8.5pc the figures are still to be audited against 9.1pc at the end of September and a hope of 11pc by the end of 2015.
Capital (Other OTC: CGHC - news) is something of a focus for 2014. Not only are the Europeans looking at it, as a vital part of the creation of the European Banking Union, but the Prudential Regulation Authority has been clear that it too will be working with all the major banks to ensure they have enough capital to survive any further shocks.
Even before Monday’s announcement, RBS was likely to be front and centre of these discussions, given that it is the laggard of the “Big Five” UK banks in not having truly recovered since the financial crisis.
As we report today, McEwan will have to meet the PRA’s Andrew Bailey and Sam (Paris: FR0011660836 - news) Woods to justify the bank’s capital position, and discuss how the decisions he intends to make in his strategy review will affect the capital position. Despite probable inflows from the sale of assets such as Citizens (NYSE: CIA - news) in the US, it is unlikely to be an easy conversation.
Given the need to bolster capital and concern over what lies ahead, the outlook for RBS in 2014 is one of restructuring and review. The beginning of the sale of the Government’s stake looks further away than ever.