As I scroll through the headlines every day, there appears to be an almost constant stream of negative articles on Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US).
This got me thinking, is there anything to like about RBS? Will the bank eventually prove doubters wrong?
Bad news first
Unfortunately, the clean-up job at RBS is far from over. Indeed, the bank’s own management has stated that it will take a further five years of restructuring before the company can claim to be on the road to recovery.
After reporting a pre-tax operating loss of £8.2bn for 2013, it’s hard to believe that the bank is even close to making a comeback.
What’s more, there are some claims that the bank is still hiding up to $100bn in losses on complex financial products. These claims have sparked fears that RBS could fail within the next ten years.
Then there is the bank’s retreat from the lucrative investment banking market, although this can be considered to be a good thing — investment banking is risky.
The bank is also under pressure from politicians to reduce bankers’ pay packets, so many of the bank’s best staff are leaving for better opportunities elsewhere.
And it is likely that this brain drain will only get worse. Indeed, RBS’s revenue is not expected to expand over the next few years so, to boost profits, the bank is being forced to slash costs by sacking thousands of staff.
Additionally, RBS is still on the hook for nearly £2bn worth of claims relating to the possible mis-selling of US home loans.
Light at the end of the tunnel
Still, there is some light at the end of the RBS tunnel. For example, during the first quarter RBS reported a pre-tax profit of £1.64bn, up from £826m a year ago.
Moreover, the bank’s Irish subsidiary, Ulster Bank, reported its first quarterly operating profit since 2009 earlier this year. The return to profit came as the Irish lender reported significant improvements in impairments, which declined 80% from the year ago period.
Further, good progress continues to be made on cost cutting. The bank’s cost base fell £671m during the first quarter and the cost-to-income ratio fell to 66%, down from 73% a year earlier. Management believes that the bank is on track to deliver £1bn in cost reductions this year.
RBS is also trying to morph into a simple UK-based bank, and management wants the bank to generate 80% of its revenues in the UK by 2018. Hopefully, this focus on simplicity and the UK market will reduce RBS’ exposure to risky assets, giving the bank a more stable and predictable income.
Foolish summary
Overall, it would appear that there are a few reasons to remain positive about RBS’s outlook. However, there could be undiscovered skeletons hidden in the bank’s closet, and for this reason alone, investors should be cautious around the company.
Nevertheless, the bank’s recovery is coming along slowly and there could be light at the end of the tunnel.
