RBS braces for US fine as it warns of profit-free decade

RBS braces for US fine as it warns of profit-free decade

Despite recording the third straight quarter of profits and defying analysts’ forecasts, largely state-owned Royal Bank of Scotland (RBS) is heading for its tenth straight year of losses, largely due to a looming massive fine in the US for mis-selling.

RBS announced £392m posted in the third quarter, taking profits so far this year to £1.33bn.

The US$44m fine for mis-selling toxic bonds that RBS has agreed with the Department of Justice (DoJ) reported yesterday will be dwarfed by the multibillion pound fine expected imminently for mis-selling of mortgage-backed securities.

RBS chief executive Ross McEwan, pictured above, said that this latter fine, despite the “good results” announced today, meant that it was “unlikely” that the bank would return to profit this year, though he remained upbeat.

McEwan predicted that the bank would return to profit next year, saying “We’ve almost got ourselves through our legacy clean-up”. said McEwan.

He said that these latest results were a vindication of his policy to focus the bank’s strategy of focusing on the domestic, UK market and to move away from investment banking.

Progress on legacy conduct issues

“We have grown income, reduced costs, made better use of our capital and continued to make progress on our legacy conduct issues,” he said, adding that the “core bank” was continuing to generate strong profits, leaving RBS on track to hit its financial targets.

RBS agreed to a US$4.2bn fine in July 2017 with the Federal Housing Agency (FHA) over mis-selling of mortgage-backed securities to government-backed home loan outfits Fannie Mae and Freddie Mac.

These loans were made ahead of the financial crisis that hit in 2008 and came at a time when RBS was one of the biggest movers on Wall St in this market.

Earlier this Chancellor Philip Hammond said that the bank “might be sold off at a loss to the taxpayer”.

Seen in this light, however, talk of selling off the bank, which is still 72% owned by the taxpayer, would seem premature for now since, until the size and scale of the DoJ fine is known, investors are likely to be chary.

Getting rid of ‘the nasty stuff’

Hargreaves Lansdown senior analyst Laith Khalaf, pictured left, pointed out that the bank is winding up its controversial Capital Resolution division, “which contains all the nasty stuff it’s been trying to get rid of”.

He added that, similarly, the SME-focused bank William & Glyn will no longer be reported separately from now on, “seeing as the European Commission is happy it doesn’t have to be spun out”.

The double-offload entailed, he said, “drawing a close to two unseemly chapters in the bank’s history”.

Of the DoJ fine, Khalaf said the”pretty imminent rap on the knuckles… could hamper its ability to pass the Bank of England’s 2017 stress test”.

However, he was positive about the bank’s domestic retail operation, saying that it was “performing pretty well, with income rising and operating costs falling sharply”.

In the short- to medium-term, said Khalf, RBS stands to be a key beneficiary of interest rate rises in the UK, “if the central bank actually follows through on its recent hawkish rhetoric”.

Preparing for sell-off?

Regarding any possible sale, “once the quantum of the [DoJ] fine is known”, this removes a major barrier for investors who might be considering buying the stock.

That said, the government’s 71% stake in RBS will mean that the presence of such a large seller will put downward pressure on the share price, irrespective of the bank’s results, and referring to a possible sale of shares at a loss as has been mooted by the Chancellor, mentioned above.

Khalaf concluded that we are unlikely to hear any news any time time soon, saying, “We may get more details on the Chancellor’s plans for RBS in the forthcoming Budget, but with political capital quite thin on the ground at the moment, this battle might be left for another day”.