On the face of it, RBS shareholders (that means you George Osborne) should be cheering after the bank released its second quarter results today. Attributable profits were up 27% to £293m for the three months to June 30, even if the bank still can’t pay a dividend.
Compared to last quarter, it’s even better – RBS made a loss of £446m at the start of the year. Indeed, analysts expected another loss this time round, an error which usually sends the markets into a frenzy (just look at Amazon). So why has the share price only risen a measly 0.5% to 355p?
The sunny headline profit figures obscure a darker and more complex picture. RBS is still in the throes of a painful and costly metamorphosis, from the acquisitive, high-stakes playboy of the Fred Goodwin era to a smaller, more austere creature, the type that owns the four identical pairs of the same shoes and polishes them every night. Think of it as a sort of rehab.
On the one hand, boss Ross McEwan has taken his liposuction syringe to the bank’s unsightly rolls of flab, with the aim of cutting annual costs by £800m. On the other, he’s busy amputating the bank’s investment arm, to protect it from the sort of risk that led to it being bailed out by the state during the financial crisis.
These processes are both going well. The annualised cost reduction is now £700m and is on target to reach £800m by the end of the year, and the bank’s dreaded risk-weighted assets are down to £326bn from £393bn last year.
Unfortunately for McEwan, this latter success necessarily involves the RBS’s profitability decreasing (there’s a reason banks like taking risks), to an extent that more than makes up for the efficiency savings. This becomes clear once you discount the £674m RBS netted from the ongoing disposal of Citizens bank in the US last quarter. Its operating profit was £304m, down 77% from a year before.
Most of that is a result of the accelerating pace of McEwan’s restructuring process – implementation costs were over £1bn this quarter, nearly three times what they were during the same period last year. But a good chunk of it corresponds to income falling faster than underlying costs.
Troubling as it is, there are bigger worries than RBS’s shrivelled investment bank. One of the reasons it just beat its previous quarter was that its ‘litigation and conduct costs’ (i.e. regulatory fines, lawsuits and compensation) were a mere £459m, compared to Q1’s £856m. But that isn’t a sign of improving times.
RBS chief finance officer Ewen Stevenson told reporters that the bank isn’t in talks with American authorities over toxic mortgage backed securities (remember them?), so there’s still the potential for billions more in fines.
'Judging the ultimate scale of conduct costs remains extremely challenging,’ said outgoing chairman Philip Hampton, who added that they had already greatly exceeded the bankers’ expectations.
The era of big fines and compensation claims will pass eventually, and RBS’s new caution will presumably help it avoid them in the future. The painful restructuring will also be completed before too long, and when both have happened RBS will likely be a profitable business.
But with the continued uncertainty about when this will happen, it’s no surprise shareholders aren’t jumping with joy. Unless Osborne waits until that day comes before he starts selling the government’s 80% stake in the bank, he may find it difficult to break even on the bail out.