Royal Bank of Scotland Group plc’s New Strategy

Before Royal Bank of Scotland Group plc (LON: RBS) releases its final results we assess some of the key issues the bank faces.

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rbsRBS (LSE: RBS) (NYSE: RBS) used to be the world’s largest bank. Growth was pursued in Asia, continental Europe, the Republic of Ireland and the US.

But the pursuit of expansion — no matter the cost — eventually brought RBS to its knees. 

With such global reach, and given the scale of wrongdoing that the bank was responsible for, fines have arrived from all corners.

This legacy of excess is something the chief executive, Ross McEwan, has sought to clean up since taking the helm in October. The road to recovery is a long one and the bank has confirmed it will post losses of up to £8bn in the coming weeks.

Learning lessons

The losses come after it admitted it will need to set aside another £3.1bn in provisions relating to legal bills and mis-selling costs. The bank also added that there would be a further £4.5bn of losses due to bad loans and investments. In total, £900m was wiped of the value of RBS after the news.

The chief executive has since commented:

“The lessons from the past are clear. In the rush for growth and profit, RBS forgot what banking is about. The bank valued least the people it should have valued most: its customers.”

Of course, he concedes that words are easy, while change is more difficult.

Unlike Barclays, where investment banking accounts for half the bank’s earnings, RBS is seeking to shift away from riskier areas, and its retail arm is at the centre of a new strategy. Customers have been failed in recent times — during one of the busiest shopping days of the year a technical glitch left millions of shoppers unable to use their debit or credit cards.

We should see this addressed as RBS is spending over £450 million to ensure that its core banking systems are fit for purpose, pledging that these systems will stay up 100% of the time.

Restoring the dividend

While the bank has begun talks with the regulators about removing their veto on dividend payments, analysts are split as to when this may happen. RBS will first have to buy out a financial instrument known as the Dividend Access Share, which was created as part of RBS’s £45bn bailout in 2008.

This mechanism makes it prohibitively expensive for RBS to pay out dividends to ordinary shareholders. To get out of the arrangement it will cost the bank between £1-2bn.

We’re looking at 2015 at the earliest, but we may at least hear some positive noises in the bank’s upcoming final results statement.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Mark does not own shares in any company mentioned.

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