RBS Seen Facing Losses in 2016, Casting Dividend in Doubt

  • Chairman says bank can't yet `be firm' on capital return plan
  • Full-year loss would undermine CEO plans to reinstate dividend

For investors in Royal Bank of Scotland Group Plc, hopes for a dividend are fading.

An expected ninth consecutive full-year loss in 2016 could undermine Chief Executive Officer Ross McEwan’s efforts to reinstate dividend payments next year for the first time since the bank’s 45.5 billion-pound ($65 billion) bailout during the financial crisis.

Howard Davies
Howard Davies
Photographer: Simon Dawson/Bloomberg

In his third year as CEO, McEwan, 58, faces a pivotal 12 months in his battle to revitalize Britain’s financial crisis poster child. His to-do list is dominated by a looming settlement with U.S. authorities over claims of misconduct in the bank’s handling of mortgage-backed securities, as he seeks to shrink the investment bank, eliminate jobs and pull out of markets around the world to boost earnings and capital buffers.

“We’ve got some wood to chop before we can be firm” on paying a dividend or starting a stock repurchase program next year, RBS Chairman Howard Davies said in an interview with Bloomberg Television’s Tom Keene and Francine Lacqua on Friday. “We’ve said that this would be a 2017 event at the earliest. We’re still hopeful of that.”

RBS shares fell 2.3 percent to 258.5 pence at 9:48 a.m. in London trading, the worst performer among major British banks. The stock slumped 23 percent in 2015.

RBS will probably reveal a net loss of 840 million pounds for 2015 when it reports earnings on Feb 26, according to the average estimate of six analysts compiled by Bloomberg. The bank may post a net loss of 2.9 billion pounds in 2016, when taking conduct and litigation charges into account, according to the survey.

“Regulators would be pretty wary of letting them pay dividends if they aren’t making a proper statutory profit,” said Steve Davies, who helps oversees 34.3 billion pounds of assets at Jupiter Asset Management Ltd. in London, including RBS shares. The lender could still carry out a stock repurchase program if the Bank of England’s Prudential Regulation Authority is “comfortable” with the bank’s financial strength, he added.

To win BOE approval to pay a dividend or buy back shares, the CEO must complete the bulk of his restructuring program this year, pass the central bank’s annual stress test in December and reach a settlement in the mortgage probe from the U.S. Department of Justice and lawsuit from the nation’s Federal Housing Finance Agency. He will also have to pay 1.2 billion pounds to the U.K. government to remove its dividend access share, which gives the state rights to a preferential payout.

$7 Billion Settlement

“We still have the overhang of a number of issues, of legal and conduct issues particularly in the U.S. on subprime mortgage selling,” said RBS’s Davies. “You announce restructuring, but the hard yards is actually achieving it. We’re downsizing the investment bank rapidly and that’s going well, but it’s still quite a lot to go.”

The Edinburgh-based lender will probably reach a $7 billion settlement in the first half of the year ahead of the U.S. elections, according to Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London with an outperform rating on the shares. With the timetable driven by U.S. authorities, McEwan has said a conclusion might not come until 2017.

Failure to reach a settlement this year could make RBS “uninvestable” for those who don’t want to be “tied down by a no-dividend policy,” according to Barua.

‘Key Hurdles’

Rising costs for misconduct have slowed McEwan’s efforts to return the bank to profit. While RBS has posted some profitable quarters since 2008, showing it can make money when excluding one-time items, conduct charges and writedowns have pushed it into a string of annual losses.

RBS could still pay a final dividend for 2016 of 10 pence a share, its first in nine years, if it’s able to convince regulators that it’s on track to improve underlying profitability, said Claire Kane, an analyst at RBC Capital Markets in London with an outperform rating on the shares.

“The regulator has ultimate discretion, but a successful stress-test outcome, strong regulatory capital, and settlement of litigation are the key hurdles,” she said.

Depending on the size and timing of the U.S. settlement, RBS could repurchase as much as 8 billion pounds of the U.K. government’s shares from as early as next year, according to Barclays Plc. The bank has enough excess capital to reduce the taxpayer’s stake to 50 percent from 73 percent, analysts Rohith Chandrarajan and Aman Rakkar wrote in a note to clients. They have an equal weight on the shares.

While the bank is making progress, “there are still clouds on the horizon,” said RBS’s Davies. “It’s still 70 percent owned by the government, still in a recovery phase. The challenges are immense.”

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