Royal Bank of Scotland Group Plc executives said the government may start reducing its 81 percent stake as soon as next year even as the bank posted a bigger-than-estimated decline in first-quarter operating profit.
Operating profit declined to 829 million pounds ($1.3 billion) in the first quarter from 1.16 billion pounds a year earlier, Edinburgh-based RBS said in a statement today. That missed the 1.2 billion-pound estimate of six analysts in a Bloomberg survey. The shares fell as much as 8.9 percent in London, the biggest drop since June 28.
Britain’s largest state-owned lender is struggling to revive earnings by eliminating jobs and cutting costs amid a faltering economic recovery and with regulators demanding it boost capital. That may complicate Chancellor of the Exchequer George Osborne’s efforts to cut the government’s stake in the lender following a bailout in 2008.
“It’s up to the government to sell the stock and it’s up to us to make the company safe and attractive again to facilitate the process,” Finance Director Bruce Van Saun, 55, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton today. “Something this year would be premature. We will be better positioned for that next year if the government wants to pull the trigger.”
The shares fell 5.7 percent to 289.8 pence in London trading, below the 407 pence a share the government sees as break even of its investment. The stock has dropped 10.7 percent this year, making RBS the worst-performing bank in Britain.
It could start selling its stake at a loss though would ultimately profit on its holding in the bank as any divestment would likely take years, Chief Executive Officer Stephen Hester, 52, said on a call with journalists today. The bank has “to release money to the taxpayer.”
“All this talk about a sale is just nonsense,” said Ian Gordon, an analyst at Investec Plc in London, with a sell rating on RBS. “It is a complete and utter irrelevance. These results are very poor, and the outlook is much worse than expected.”
After coming under pressure from regulators to boost capital, RBS said earlier this year it would further shrink its profitable investment-banking business. Revenue from the markets business, the lender’s second-biggest unit after consumer and commercial banking, fell to about 1 billion pounds in the first quarter from 1.7 billion pounds a year earlier.
That compares with a 1.2 billion-pound estimate from Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd. in London, who has a market-perform rating.
“The markets business is very disappointing,” said Cormac Leech, a banking analyst at Liberum Capital Ltd. in London with a buy rating on the shares “There’s a risk the pressure the government is putting on it kills the golden goose.”
Lloyds Banking Group Plc, Britain’s second-largest state-owned lender, earlier this week posted an almost threefold increase in first-quarter profit as impairments for souring loans dropped by more than analysts estimated. Pretax profit rose to 1.48 billion pounds from 497 million pounds a year earlier, as provisions fell 40 percent to 1 billion pounds.
Lloyds CEO Antonio Horta-Osorio said in an interview yesterday that he expects to complete his turnaround plan as soon as next year as the government seeks to cut its stake.
At RBS, the drop in markets revenue contributed to a 19 percent decline in operating profit at the so-called core unit, the assets it plans to keep. Profit at the U.K. consumer unit fell 12 percent to 557 million pounds in the quarter, and was down 19 percent to 543 million pounds in business banking.
Hester said the bank cut capital at its markets business by 25 percent in 2012 and will continue to do so.
“I warned everyone in the full-year results that revenue would come down faster than costs,” he said. The bank is “running hard to stand still. We’re working hard on costs and impairments to offset revenue trends.”
Since Hester took over as CEO in 2008, he has shrunk the balance sheet, cut costs and announced more than 36,000 job cuts. He reduced assets at the firm’s so-called non-core business by 4.5 billion pounds in the quarter to 52.9 billion pounds from 258 billion pounds at the end of 2008. Operating costs declined by 3.5 billion pounds to about 4 billion pounds in the year-earlier period.
Hester said that there “will still be bumps in the road and there are plenty of challenges ahead.”
“Income is likely to mirror customer activity levels,” Shailesh Raikundlia, an analyst at Espirito Santo Investment Bank in London with a sell rating on RBS, wrote in a note to clients. “Markets-related income remains difficult to predict, but we expect a muted year overall as the business transitions toward its revised steady-state shape and size.”