Will Royal Bank of Scotland Group plc Ever Return Value?


After announcing full-year losses of £8 billion, the bad times don’t appear over for RBS  (LSE: RBS) (NYSE: RBS.US), and we don’t know how heavy future losses could be.

The new chief executive, Ross McEwan, is preparing a radical overhaul of top management to increase focus on retail and small businesses. Still dogged by its poisonous past, business secretary Vince Cable commented on the situation: “It’s an absolutely shocking story that the British taxpayers are still paying for the excesses of this bank in the boom period before it collapsed.”

£46 billion of public funds bailed out RBS in 2008. Since then, its share price has fallen to below a third of what the government paid. The moment when RBS gets sold off — once a bank is created that will provide a reward to British taxpayers — appears further away than ever.

What’s going wrong?

A real problem for RBS is the increasing aggressiveness of US regulators and litigators. More than £3 billion has been set aside to cover litigation and compensation claims, including £1.9 billion to cover mainly US action over mortgage-backed financial products.

The announcement initially wiped £900 million off the bank’s value, but the downward pressure didn’t continue, and by the end of the week shares were actually up a little over 2%. The bank’s litigation provisions, placed in context with its American peer group, don’t appear quite so horrific. For instance, JP Morgan Chase in November agreed a record £7.8 billion settlement over the sale of poor quality mortgage-backed securities.

The trouble is that the losses will continue to pile up. Further claims and big fines could yet emerge, stemming from alleged manipulation in the foreign exchange market, while all possible losses have not yet been absorbed from the LIBOR scandal.

What to expect

Eager to leave the past behind, Ross McEwan was quick to point out that the present leadership wasn’t responsible for the current situation. The mentality of pulling forward future bad news is to deal with it and move on, enabling McEwan and his new team to get working on the transformation, unburdened by prior misdealings.

Due to concerns about its capital position there’s now pressure on RBS to sell assets, such as the planned disposal of Citizens Bank in the US, which adds up to 15% of the bank’s total risk-weighted assets. The possibility is that the bank may be forced to add other assets to the list of those to sell, such as its Coutts private bank.

The cost of all these financial measures drags down the bank’s core tier one capital target almost 50% below the level it had hoped to reach before 2016. Given RBS’s weak financial position, it’s highly unlikely we’ll see a sell-off for a couple of years, likely following the next general election.

Should I buy RBS?

There are still a lot of unknowables, such as the willingness of a potential Labour government to follow through with plans to cap the market share of big banks, as well as factoring  future potential losses into the bank's valuation.

The shares may look cheap, for instance, but will things get better?

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> Mark does not own shares in RBS.