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RBS Posts Larger Net Loss, Warns of Delay to Dividend Payments

  • Litigation, restructuring costs drop from a year earlier
  • Revenue falls 13% as investment-bank unit contributes less

Royal Bank of Scotland Group Plc reported a deeper first-quarter loss as it began to repay the U.K. government for support received during the financial crisis, and said it will take longer than expected to resume dividends.

The net loss more than doubled to 968 million pounds ($1.4 billion) from 459 million pounds a year earlier, the Edinburgh-based lender said in a statement on Friday, missing estimates in a company compiled survey. The bank also warned on Thursday there was a “significant risk” it would miss a European Union deadline to sell its Williams & Glyn consumer unit by the end of next year, delaying the prospect of shareholder payouts.

Chief Executive Officer Ross McEwan has repeatedly deferred investor expectations of the first RBS dividend since the financial crisis, even though the bank has more capital than regulators require. Repeated false starts separating the 300-branch consumer unit, a looming settlement with U.S. authorities over the sale of mortgage-backed securities and stress tests from the Bank of England are all obstacles to the payout.

“It looked like a headline miss, but it’s all overshadowed by yesterday’s Williams & Glyn uncertainty, which hurts, or at least postpones, the overriding investment case,” said Ian Gordon, an analyst at Investec in London with a buy rating on the shares.

RBS dropped 4 percent in London trading to 235 pence as of 12:56 p.m. The stock has fallen about 22 percent this year, making it the worst performing major British lender. The government has said RBS needs to trade 407 pence a share to break even on its 2008 and 2009 rescue.

“I would continue to caution on the timing for a return to capital distributions,” Chief Financial Officer Ewen Stevenson said on a call with reporters. “We’ll get there as quickly as we can address issues that we need to address.”

Dividend Delay

RBS paid 1.2 billion pounds to the Treasury in March to scrap the state’s right to preferential payouts, paving the way for eventual dividends. Pretax profit excluding that payment as well as restructuring costs and conduct and litigation charges was 440 million pounds, down from 1.4 billion pounds a year ago.

RBS’s common equity Tier 1 ratio, a measure of financial strength, fell to 14.6 percent at the end of March, from 15.5 percent at the end of 2015. The bank plans to eventually return all capital above a 13 percent level to investors.

The Bank of England must be comfortable that an “exit is assured” for Williams & Glyn before it signs off on RBS’s dividend plans, McEwan said on a call with analysts. While the bank is running into difficulties creating a standalone computer system for the unit, it has made some progress transferring some of the 700 functions, including payroll and human resources, he added.

“We know Williams & Glyn was a disappointment, but crikey we’re working very hard on that,” McEwan added. “We want it out but we had to tell you about the significant risks associated with it.”

Revenue Drop

Revenue fell 13 percent, driven by a 36 percent drop at the securities unit amid what Stevenson called a “tough start to the year.” RBS took a 223 million-pound impairment charge primarily related to a portfolio of shipping loans it’s looking to exit, as well as a 238 million-pound charge for restructuring, mainly related to the overhaul of its investment bank. 

“Core revenues continue to slide,” Andrew Coombs, a Citigroup Inc. bank analyst, wrote in a note to investors. “Meanwhile, there is a risk that any dividend is now delayed until 2018, given the update on W&G.”

The net interest margin, the difference between the bank’s income from lending and cost of funding, was stable at 2.15 percent in the quarter from a year earlier. RBS warned the U.K. referendum on European Union membership on June 23 was among potential risks to its business causing “uncertainties” for its earnings outlook.

“You’ve seen from our results we’re achieving good growth in our core businesses, in the markets we like we’re doing very well,” McEwan said on a call with reporters. However, “this is another year of heavy lifting and there will continue to be a lot of noise in our results. We do signal there are still challenges ahead for this bank.”

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