Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Royal Bank of Scotland, bailed out by British taxpayers in 2008 and still majority owned by Her Majesty's Government, has made progress toward recovery. But it'll be people in Brussels, not George Osborne, who decide whether it's done enough.

First-quarter results showed some of the scale and pain of the eight-year clean-up. The lender sank deeper into the red after repaying the U.K. for support received in the crisis -- a 1.2 billion pound ($1.75 billion) hit that from a financial perspective gets the bank closer to paying out dividends again.

RBS is half its 2008 size, the capital base is above the industry average and it's one of a few banks to have quit entire business lines. Dividends should really be around the corner, one-off costs and litigation charges notwithstanding.

A Royal Affair
Shares have fallen over past year
Source: Bloomberg

But there's one hurdle left that depends on EU regulators rather than cutting cost: the Brussels-imposed separation and sale of the Williams & Glyn consumer bank by the end of 2017. RBS is now warning of the "significant risk" it will miss that deadline; and incur penalties that could include the EU taking over the sale process.

RBS says finding a buyer isn't the problem (several domestic lenders have shown interest.) The difficulty is hiving off the unit from the bank's smorgasbord of IT systems. RBS said it was too early to talk about applying for an extension but it looks like time is what's needed.

Granting RBS more time to sell should be a fairly straightforward decision. The lender has put plenty of effort into overhauling its business model and slashing its balance sheet. It's hardly dragging its feet to preserve profits. There are an eye-popping 5,000 RBS staff working on the Williams & Glyn split alone. The process is costing about 50 million pounds a month. Even though the RBS horde has had plenty of time, applying penalties might be harsh.

Profit Drag
Williams & Glyn restructuring costs are a fairly steady drag on profits at RBS
Source: Company reports

But there might be complications. Brussels has granted an extension before. And the reason for forcing a sale in the first place is to ensure rules on state aid are followed: the sale was offered by the U.K. as a competition-protecting remedy when it bought RBS. 

Relations between the U.K. and E.U. have also been frayed by the threat of Brexit, even if RBS management reckons the Brussels deadline will stick whatever the outcome of June's referendum.

The simplest argument for extending or even abandoning the deadline, however, is competition in the U.K. banking sector. The British mortgage market has become more cutthroat thanks to new challenger banks. Margins are being squeezed and even big lenders like Lloyds are holding back. If Williams & Glyn is sold to a challenger such as Virgin Money, will that really make much difference to a consumer who already has lots of choice?

RBS has already flagged to shareholders that it will take longer to become the good bank it wants to be. In an ideal world, Brussels would drop the sale condition and thereby allow RBS to start paying dividends again. Failing that, it should at least be flexible.

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

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

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