Royal Bank of Scotland hit means another massive loss
27th January 2016 12:08
by Lee Wild from interactive investor
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Two years after taking the reins at , chief executive Ross McEwan is still trying to "clean-up" the taxpayer-owned bank. And a month before full-year results are unveiled, he's just softened up the market for another big loss in an unscheduled trading update.
A massive increase in pension costs and provisions for bad behaviour fines will wipe almost £2.5 billion off attributable profit in the fourth quarter of 2015. The total impact of £3.6 billion on tangible net assets will make shareholders wince and cast doubt over forecasts for a resumption of dividend payments.
It certainly caused an exodus early Wednesday. RBS shares fell as much as 5.7% within five minutes of the opening bell to their lowest since 2012. They clawed back some of the losses quite quickly, yet remain in negative territory. Investec still pencils in a dividend of 5p in 2016, rising to 15p next year.
A change to pension rules has forced RBS to revise its pension accounting policy. Speeding up payments to reduce its defined benefit scheme's £5.6 billion deficit will reduce tangible net assets (TNAV) by £1.6 billion, or 13p per share. The Common Equity Tier 1 (CET1) capital ratio - a measure of financial strength - falls by 0.7%.
Making a £4.2 billion payment to the pension scheme will also damage profits in 2016 by about 3p to TNAV and 0.3% to CET1.
On top of that there's a $2.2 billion (£1.5 billion) provision to cover US residential mortgage-backed securities litigation claims. That will cost RBS £1.5 billion of profit in 2015, take a further 13p off TNAV and reduce the CET1 by 0.6%. It also takes the total damage for alleged mis-selling to £3.8 billion.
Add on a further £500 million of Payment Protection Insurance (PPI) claims, which comes off the bottom line, and net assets drop by 4p and CET1 by 0.2%. Impairments at the private banking business lop off another £498 million of profit.
Investec now thinks RBS lost £2.35 billion in 2015. A year earlier it reported a £3.5 billion deficit and a £9 billion loss in 2013.
Factor in a total hit to TNAV of £3.6 billion, or 30p a share, and a 1.6% knock to CET1, and RBS expects to flag a CET1 capital ratio of 15% and TNAV per share of 350p when 2015 results are published on 26 February. In September, they were 16.2% and 384p.
Putting the past behind us
"I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank," said McEwan Wednesday. "We will now continue to move further and faster in 2016 to clean-up the bank and improve our core businesses."
"…although there is clearly much more to do, this announcement is a further step towards addressing legacy issues and building a great bank for our customers and delivering long-term value for our shareholders."
It's worth pointing out that today's statement makes no mention of ongoing investigations in the US, which could result in another slug of heavy misconduct fines.
We reported yesterday how UBS analyst Jason Napier believed RBS shares were "much too cheap". "We think a legacy-free RBS should trade in line with at 1.3x TNAV, as uncertainty begins to clear," he said, valuing the shares at 350p.
Investec's Ian Gordon trimmed his target Wednesday from 395p to 320p, but still says 'buy'. The shares now trade on 0.7 times TNAV.
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