Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Pity Royal Bank of Scotland. The bank's doing plenty right, then along comes Brexit. The uncertain outcome of the poll on Britain's EU membership weighs on many U.K. businesses, but RBS has more to be worried about than most.

Investors didn't like the bank's annual results announced Friday. RBS shares sank more than 8 percent after it reported a net loss of 1.98 billion pounds ($2.8 billion) for 2015. Excluding costs for restructuring, litigation and conduct, pretax profit of 4.4 billion pounds narrowly missed expectations.  Importantly, capital distributions will probably not restart until after the first quarter of 2017 -- later than hoped.

Management deserves credit for progress on fixing the still government-controlled bank. Common Equity Tier 1 Capital has risen sharply to 15.5 percent, ahead of a long-term target of 13 percent. Costs are falling too: adjusted operating costs are down about 2.5 billion pounds in the past two years and management says it can cut another 800 million pounds in 2016.

Getting Stronger
RBS's CET1 Capital Ratio, a measure of balance sheet strength, has improved year-on-year
Source: Company
Cost Cutters
Adjusted operating expenses are coming down steadily at RBS
Source: Company
Adjusted operating expense excludes restructuring costs, litigation and conduct costs, and write down of goodwill

The bank now makes 90 percent of its income in the U.K. and Ireland, in line with a goal of focusing on its home market. It's gaining market share in U.K. mortgages without resorting to lower pricing.

All of which is commendable, especially given the mess the current RBS crew inherited. But it doesn't count for much with investors, who are only interested in when RBS will restart dividend payments. Thanks in part to Brexit, that's still far from certain.

Against the backdrop of a troubled global economy, the British referendum adds local "idiosyncrasies," RBS chairman Howard Davies said Friday. Translation: the vote will weigh on near-term U.K. investment and growth and makes the enforced sale of retail unit Williams & Glynn even more difficult.

Another wildcard is that if the U.K. votes to quit the EU, a second Scottish independence referendum in quick succession could raise its head. That would be awkward for the Edinburgh-headquartered bank.

Brexit is certainly not the only factor weighing on RBS. The timing and size of the fines related to the sale of RMBS in the U.S. are getting closer, but are still unknown. The prospect of low interest rates lasting longer than expected is a drag on earnings across the industry.

Royal Rumble
RBS shares have been sold off more heavily than its U.K. rivals in 2016
Source: Bloomberg

Despite cuts the bank has already made, the cost to income ratio (excluding one-off items) still stands at about 72 percent, well above a long-term target of 50 percent or less. And the disposal of Williams & Glynn is proving complicated -- executives say there are about 50,000-60,000 "project pieces" involved in extracting the unit from the broader bank.

Still, these issues really only matter in so far as they have an impact on the ability to pay a dividend. That's "a critical underpinning of our equity story," said CFO Ewen Stevenson. The path to payouts is difficult enough. For RBS, the Brexit uncertainty is another obstacle to a brighter future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net