If you thought you were getting a bargain in August when George Osborne sold £2.1bn worth of RBS shares at a 2.3% discount, you may want to avoid looking at the following chart.
Rollercoasters can't keep going down forever, can they? Source: Yahoo Finance
RBS shares have fallen 44% from their summer high. The bank has been tormented by ‘legacy issues’ from the bad old days – charges over the likes of PPI and toxic mortgages, and the heavy costs of dismantling its Fred Goodwin-era investment bank. Investors underestimated quite how painful and persistent these problems would be. Shares fell 9% just this morning to 222p on the news the bank lost £2bn last year, its eighth consecutive full-year loss.
RBS’s results make for pretty grim reading. Underlying profit was down (by 27% to £4.4bn), litigation costs were up (by 64% to £3.6bn), restructuring costs were up (by 150% to £2.9bn) – only 2014’s heavy losses from discontinued operations prevented 2015 from being much worse.
But there is cause for hope. The reason restructuring costs were so high is that the process of dismantling RBS’s investment bank has been ‘accelerated’. Its bad bank (RCR or Capital Resolution) cut dreaded risk-weighted assets (RWAs) by almost half to £49bn. It's now ditched 88% of the problem assets set aside in 2013, and expects RWAs to be only £30bn by the end of this year.
As the bad bank winds down, the losses and restructuring costs from getting rid of those assets will also lessen. The whole process was supposed to last from 2015 to 2019, but by all accounts RBS is well ahead of schedule. McEwan expects restructuring costs to ‘remain high in 2016, totalling over £1bn’, but says that ‘most of the remaining signalled disposal losses are expected to be incurred in 2016’.
The era of titanic fines and lawsuits from boom era misdemeanours may also be coming to an end. The FCA is proposing a deadline for PPI claims, probably in 2018, while in the US, there’s talk that a settlement could be imminent over claims that RBS misled investors before the crisis into buying ‘toxic’ mortgage-backed securities.
This big, bad fine could reach as much as $13bn (£9.3bn), so it’s premature to say RBS is out of the woods yet. But the end is perhaps in sight. 'We hope to conclude many of the remaining substantial conduct and litigation issues over the coming year, but the timing of many of these matters is not in our hands,' McEwan cautioned.
Once the weights of restructuring and litigation are removed from the bank’s neck, it will be free to frolic as a retail and commercial cash cow – and that’s when the British government will really push to sell down its remaining 73% stake.
Until that happens, we can continue to expect the same old same old from RBS – losses, fines and controversy over McEwan’s pay, which doubled last year to £3.9m. Somehow, the fact that this is still a lot less than his opposite number at fellow (former) bailout-case Lloyds is unlike to assuage public ire, or indeed shareholders’. And unlike Lloyds’ boss Antonio Horta-Osorio, McEwan isn’t able to pull a dividend out of the hat to make up for it.