Finance

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

It's nearly a decade since Royal Bank of Scotland Group Plc was bailed out. Today, the lender is still owned by taxpayers, shunned by shareholders and ruled by regulators.

The management team has little else it can really do but keep shrinking and hope the bank can eventually buck a nine-year run of losses. These are noble objectives, but run the risk of further self-harm as revenue falls and competitive pressures rise. Until the backlog of past crisis issues is cleared -- which may not be before 2018 -- nobody can really say what RBS is worth. The U.K. government will be stuck with this basket case a while yet.

Nine Years of Hurt
RBS' share price over the past decade shows the cost of government ownership and losses
Source: Bloomberg

RBS's results on Friday showed management is delivering on costs (down 12 percent) and balance-sheet shrinkage (unwanted assets reduced by 75 percent since early 2014) -- but failing on just about everything else.

The 7 billion-pound loss is the result of a triple hit: more provisions for litigation bills, the failed spin off of the Williams & Glyn division required by European Union regulators, and weaker revenue. The promise of yet more cost reductions wasn't enough to stop the shares falling 4 percent. Faith alone is no healer.

Long Road Ahead
Return on tangible equity for RBS' core bank, its whole bank and its 2020 target
Source: Company filings

Remember that this is a bank whose core operations are basically at peak profitability, generating an adjusted return on equity of around 11 percent last year, according to estimates from Bernstein. Add back in all the bad or unwanted bits, and you get a piffling return of 1.6 percent, even in an environment of low loan losses and with the "Trump bump" helping financial markets. The investment banking arm had little positive to show in the fourth quarter, with expenses eating up all of its revenue. Its already stunted ambitions will likely have to recede further.

No Trump Bump
Fourth-quarter figures for NatWest Markets show revenue was eaten up by costs
Source: Company filings

RBS is essentially being forced into a vicious cycle of pruning costs and chasing more U.K. revenue at a time when competition is tough, the economy is set to slow and big regulatory unknowns have yet to be cleared.

It's a relief that RBS may not have to split off Williams & Glyn, given the expensive failure to separate its IT systems, but there's still the risk regulators will require the bank to offer help to smaller rivals.

The U.S. mortgage litigation is another hurdle to normality and largely outside the bank's control -- though it may be nearing resolution. RBS has already set aside about $8 billion, by HSBC analysts' reckoning, to cover the case, but you can't be sure that will be sufficient.

A bad surprise on restructuring or legal costs ahead would threaten the bank's 13.4 percent capital ratio, one its few attractions for investors.

You could try and muster a bit of optimism and assume that if the twin issues of Williams and Glyn and the U.S. litigation are resolved by early 2018, then that should pave the way for dividends to flow back to long-suffering owners, including Her Majesty's Government.

But it's already been a lost decade for RBS, and new targets are being pushed out to the post-Brexit era. Setting 2020 financial targets such as a 12 percent return on tangible equity and a truly dream-like 50 percent cost-to-income ratio are all and well good. But doing so assumes a degree of predictability about the future, not least over central-bank policy after Brexit.

Independence day for this bank still looks far away.

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:
Edward Evans at eevans3@bloomberg.net