RBS Securities Arm Swings to Loss on Restructuring, Conduct Cost

Royal Bank of Scotland Group Plc’s shrinking securities business swung to a loss in the first quarter, hit by higher restructuring and litigation costs.

Earnings in corporate and institutional banking, the unit housing most investment bank activities, posted an operating loss of 741 million pounds ($1.14 billion), compared with an operating profit of 333 million pounds a year earlier. The division incurred 500 million pounds of litigation costs and 291 million pounds of restructuring expenses.

Revenue tumbled 40 percent year-on-year at the unit, which is being dismantled by Chief Executive Officer Ross McEwan to make the Edinburgh-based lender a smaller, simpler bank. However, income rose from the previous quarter on the surge in trading rates and credit that has helped other securities firms.

The “seasonality of this franchise and ongoing restructuring” is likely to push quarterly CIB income lower this year, Chief Financial Officer Ewen Stevenson said on a conference call.

RBS may cut as many as 14,000 jobs, or more than two-thirds of its staff at the unit, a person familiar with the plan said in March. The company posted a seventh straight annual loss in

2014.

CIB has also suffered management turmoil. Chris Marks and Mark Bailie are running the business after the exit of Rory Cullinan after only a month in the role. Cullinan, who had run RBS’s bad bank, had a dispute with other executives, a person with knowledge of the matter said last month.

Quarterly Surge

The CIB results are “no surprise given the restructuring plan,” Chirantan Barua, an analyst at Sanford C. Bernstein in London, said in a note.

Income from the rates business surged to 217 million pounds from 79 million pounds quarter-on-quarter, while currencies income shrank 32 percent, hurt by the Swiss central bank’s decision to scrap its cap on the franc’s exchange rate with the euro. Total CIB income was 804 million pounds, up from 691 million in the fourth quarter of 2014.

Rates “benefited from heightened volatility and from the commencement of quantitative easing by the European Central Bank,” RBS said of the quarter-on-quarter performance. The drop year-on-year “reflected the reduction in resources deployed, most notably in credit, which included the U.S. asset-backed products business.”

RBS said in November it was exiting commercial real estate, commercial-mortgage bond trading and government-backed home-loan securities in the U.S., parts of a mortgage business that it previously said it would only scale back.

Like other global firms, RBS has been hurt by heavy costs linked to fines for past misconduct such as currency rigging. That has slowed the government’s plan to eventually sell its 80 percent stake in the bank.

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