Will Royal Bank of Scotland Group plc Ever Stage A Full Recovery?

It has now been around five years since Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) was bailed out by the UK tax payer, and so far the bank has failed to show any signs of recovery.

For example, the bank has spent all of the £46bn pumped in by the government to rescue the failing lender, and RBS’s share price remains 96% below the highs reached at the beginning of 2007.

So, the question on everyone’s lips is, will RBS ever stage a full recovery?

Political controversy

It would appear that one of the biggest factors holding back RBS’s recovery is the bank’s largest shareholder, the UK government.

Indeed, the government still owns 81% of RBS and is using this controlling stake to influence RBS’s day-to-day operations.

Unfortunately, while the government may have the best intentions, RBS has become somewhat of a political punching bag and political pressure is slowing the bank’s return to health. Specifically, political pressure was quoted as the reason why the bank’s previous boss, Stephen Hester, left his post. 

Hester’s departure was a blow for RBS as he was well respected within the City and many commended his performance at the bank.

However, more recently the government has blocked RBS’s request to pay some staff up to 200% of their annual salaries in bonuses. 

Many City analysts have stated that as a result of this move by the government to block bonus payments, RBS is now one of the only Western banks that cannot offer staff salaries similar to those offered across the rest of industry.

This lack of competitiveness is already eating into RBS’ bottom line, as the bank has been forced to wind down its investment division. RBS’ investment division contributed 10% of group profits last year as opposed to 60% back during 2009.

As RBS’s lucrative investment bank winds down, it’s unlikely that the bank will ever be able to return to the glory days reported pre-2008.

Lacking capital

As politicians continue to argue over RBS’ future, the bank’s losses are growing and some analysts are now starting to call into question the company’s capital position. 

Particularly, following RBS’ profit warning earlier this year, the bank’s fully loaded Basel III Core Tier One capital ratio is expected to fall between 8.1% and 8.5% by December of this year.

A capital ratio of less than 10% is considered low.

What’s more, RBS is targeting a capital ratio of 11% by 2015, although it is now becoming clear that unless the bank can quickly turn things around, this target will not be met. 

Further, as the bank is likely to miss its required capital target, it is becoming likely that RBS will have to ask either investors or the government for more cash. This calls into question the current City forecasts that predict RBS will pay a dividend this year.

Still, RBS’s sale of its US business, Citizens and the initial public offering of private bank, Williams & Glyn’s will add some extra cash to the company’s empty coffers.

Foolish summary

Overall, it has been five years since RBS’s collapse and the bank is still struggling. Political pressure, loss of key talent and a lack of capital are three major factors that continue to haunt the bank and hold back a recovery.

What’s more, as RBS has been forced to sell off and divest many assets as part of its bail out, when the bank does return to profit, it is unlikely that these profits will never reach the levels reported pre-2008.

All in all then, it would seem as if RBS will never be able to stage a full recovery. 

Still, the rest of the banking sector contains many highly profitable banks with stable balance sheets and some even offer dividend yields in excess of 5%.

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Rupert does not own any share mentioned within this article.