Royal Bank of Scotland Group plc Shareholders Face Five More Years Of Pain

It has been more than five years since the financial crisis took hold and Royal Bank of Scotland Group plc (LSE:RBS) (NYSE: RBS.US) received its £46bn government bailout. 

However, RBS is still not showing any signs of recovery and the bank’s losses racked up during the past few years now exceed the total value of the bailout handed to the company. 

Unfortunately, it would seem as if RBS shareholders will have many more years to wait before the bank can claim that it has started to turn things around. 

More pain to comerbs

RBS’s new chief executive, Ross McEwan, has stated that the bank will require a further five years of restructuring before the company’s turnaround can be considered to be nearing completion.

However, over this period the bank’s revenue is not expected to expand. So, in an attempt to grow profits, the bank is aiming to slash costs by around £5bn per annum over the next few years. As part of this cost cutting, RBS is planning to cut upto 25% of its global workforce.

Unlikely to return to former glory

Unfortunately, management has recently quashed any expectations that the bank will ever be able to return to its former glory.

Indeed, new CEO McEwan has been quoted as saying:

“Let me spell it out very clearly: the days when RBS sought to be the biggest bank in the world, those days are well and truly over.”

What’s more, even if RBS tried to re-establish its pre-financial crisis ambitions of seeking to become the biggest bank in the world, it would come under serious pressure from its largest shareholder — the government.

It seems as if the government is against RBS returning to any sort of growth, as the recent move to block RBS’s request to pay large bonuses to some of its staff has made RBS one of the most uncompetitive banks in the world.

Due to government intervention, RBS has also been forced to wind down its lucrative investment banking arm. RBS’s investment division contributed just 10% of group profits last year as opposed to 60% back during 2009.

But RBS’s troubles are not just limited to government intervention. Following RBS’s 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 the end of the year. A capital ratio of less than 10%,m whilst above the regulatory minimum of 7%, is considered low. 

RBS had previously been 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.

Sadly, this poor capital ratio implies that RBS is unlikely to be able to offer investors a dividend payout for some time to come.

Foolish summary

Overall, it seems as if investors in RBS will have to hunker down for the next few years.

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.