Banks have been accused of ‘underlyingitis’: producing various versions of their profit figures to tell the story they want to. So I’ve taken to applying my own consistent, judgemental analysis to banks’ income statements, sifting them into two figures: underlying profits — generally, what the banks would like their profits to be; and statutory profits before the fair value adjustment of the banks’ own debt (FVA) — the warts-and-all bottom line. You can follow the links to see my analysis of Barclays‘, Lloyds‘ and HSBC‘s results.
Here are the last three years’ results for RBS (LSE: RBS) (NYSE: RBS.US):
|
£m |
2011 |
2012 |
2013 |
|---|---|---|---|
|
Underlying profit before tax |
1,100 |
2,777 |
2,320 |
|
Exceptional/one-off items |
(3,354) |
(1,214) |
(6,599) |
|
Litigation |
(850) |
(2,191) |
(3,844) |
|
FVA |
1,914 |
(4,649) |
(120) |
|
Statutory profit before tax |
(1,190) |
(5,277) |
(8,243) |
|
Statutory profit before FVA |
724 |
(628) |
(8,123) |
Addicted?
Has RBS become addicted to red ink? Since 2008 it has lost more than the £45bn the government ploughed into it in 2008 to rescue it from the consequences of Fred Goodwin’s over-expansion. The bank is now pedalling hard in reverse, with yet another new strategy from recently installed CEO Ross McEwan, doing Chancellor George Osborne’s bidding to turn RBS into a Lloyds-lookalike by taking an axe to the investment bank, accelerating the disposal of Citizens bank and restructuring from seven operating divisions to three to cut costs drastically.
There’s a danger the shrinkage-is-a-good-thing mindset can be as destructive as self-aggrandising growth. The deteriorating bottom line in the chart above is partially self-inflicted. Nearly £5bn of last year’s exceptional losses are due to the bank accelerating the disposal of problem assets by creating an internal ‘bad bank’. That’s also a strategy straight from the mouth of government, and RBS’s minority private sector shareholders might reasonably wonder whether it’s in their best economic interests.
The top line of the chart shows that RBS makes a moderate profit before charges for past misdemeanours, including the bank’s involvement in mortgage-backed securities and PPI mis-selling. But the new strategy foreshadows more years of restructuring costs.
Missing the bus?
The bank has now set long-term profitability targets, aiming to have a ‘steady state’ performance by 2018-2020. By that time it should be a convincing Lloyds bank lookalike: but the positive headwind of economic growth and burgeoning mortgage business that’s boosting Lloyds might have evaporated by then, and there will be new challenger banks in the market.
Meanwhile, RBS has warned that “a vote in favour of Scottish independence would be likely to significantly impact the group’s credit ratings”. That’s a story that could grow: though, if you follow the Motley Fool, you’d have seen it coming.
