Royal Bank of Scotland Group Plc posted the biggest full-year loss since its bailout in 2008 as Chief Executive Officer Ross McEwan outlined plans to return what he called the industry’s least-trusted lender to profit.
The net loss widened to about 9 billion pounds ($15 billion) in 2013 from 6.1 billion pounds in the year-earlier period as the lender logged more than 12 billion pounds in charges for impairments, customer redress and legal costs. The pretax operating loss, at 8.2 billion pounds, missed the 5.28 billion-pound estimate of 11 analysts surveyed by Bloomberg.
McEwan is trying to revive earnings after 46 billion pounds of losses in six years by combining units, shrinking the investment bank and cutting jobs. More than five years after giving RBS the biggest bank bailout in history, the government still hasn’t been able to cut its 80 percent stake. The bank is also under political fire for awarding 576 million pounds of bonuses to staff, a debate McEwan today called “emotional.”
“The key challenge for them is how to return to profitability to allow themselves then to normalize their ownership structure,” said Edward Bonham Carter, CEO of Jupiter Fund Management Plc (JUP), which oversees about 32 billion pounds. “The issue for them through their reorganization is how to reduce the size of the balance sheet, which they have started. They have to simplify their structure.”
The stock fell 7.7 percent to 326.6 pence in London trading, the most in more than 18 months. The shares still trade below the 407-pence price at which the government says it would break even on its holding. RBS is down 6 percent in the past year while Lloyds Banking Group Plc (LLOY), the second-biggest government-owned lender, is up 52 percent.
“We are the least-trusted company in the least-trusted sector of the economy,” McEwan, 56, told reporters in London today. “That must change,” he said. “We need to be a smaller, simpler and smarter bank.”
McEwan today set a profitability target of a 12 percent return on tangible equity in the “long term.” The lender will also seek to reduce costs to about 55 percent of income over the next four years, down from 73 percent today. It will also seek to bolster its core equity tier one capital ratio to about 12 percent.
The Edinburgh-based lender will reduce risk-weighted assets in the international banking and securities unit by 50 billion pounds -- about a third -- by 2020 as well as reduce costs by 5 billion pounds over the next four years.
“The financial targets are potentially realistic, but probably too distant” for analysts to boost their earnings estimates for earnings from 2014, Citigroup Inc. analysts Andrew Coombs and Ronit Ghose wrote in a note to clients.
To achieve those targets, RBS will combine seven units into three: personal and commercial banking, run by Les Matheson, commercial and private banking, headed by Alison Rose, and corporate and institutional banking, overseen by Donald Workman.
The personal business will aim to generate about half of RBS’s profit and produce a return on equity of about 15 percent. The corporate unit will account for about a fifth of profit and produce a 10 percent ROE, RBS said.
The Treasury has been pushing RBS to focus on U.K. consumer and corporate banking as it tries to recoup some of the 45.5 billion pounds it spent bailing out the company. Former CEO Stephen Hester sought to revive profit by shrinking assets and cutting costs. He departed in June after the government pressed him to shrink the securities unit, and five months later RBS set up an internal bad bank in an effort to speed up the cleaning up of its balance sheet.
The lender also sold a 1.11 billion-pound stake in Direct Line Insurance Group Plc (DLG) yesterday. RBS had to divest its holding in the U.K.’s biggest home and car insurer to comply with European Union state aid rules after receiving its bailout.
“The reorganized bank will be a U.K.-focused retail and corporate bank with an international footprint to drive its corporate business,” RBS said.
Full-year operating profit at the core markets business that RBS plans to retain fell to 620 million pounds from 1.51 billion pounds, while profit from the retail and commercial arm declined by 36 percent on the same basis to 2.7 billion pounds.
The lender can’t say how many jobs will be cut until the three business heads develop their plans, McEwan told reporters. RBS will pay employees 576 million pounds in bonuses for 2013, down from 679 million pounds in the previous year. Staff at the markets unit will receive 237 million pounds in variable compensation, compared with 287 million pounds in 2012.
“I need to keep people doing their jobs,” McEwan said. “We need to be pragmatic.”
The payouts prompted criticism from both Deputy Prime Minister Nick Clegg and opposition lawmaker Chris Leslie. Clegg told ITV’s Daybreak program the government-owned lender shouldn’t be “dishing out ever larger amounts” in bonuses.
“Taxpayers will be incredulous that such large bonuses continue to be paid out at a time when huge losses are being made,” Leslie, the Labour party’s shadow chief secretary to the Treasury, said in an e-mailed statement.
The lender also warned that a decision by Scottish voters to opt for independence from the U.K. could “significantly impact” the firm’s credit rating. An independent Scotland could also subject the bank to new laws and regulations and affect its relations with the European Union, it said.
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