24 Feb 2017

Bank of Scotland: The Storm Hasn’t Passed Yet

Hard times continue for Royal Bank of Scotland (RBS) since the report of £7 billion annual loss which marked the 9th year of crisis for the bank. The debt is more than 3 times bigger than the £2bn announced in 2015, although not as bad as the £24.1bn in 2008, the biggest loss in British modern corporate history.

The abandonment of their plan to develop the Williams & Glyn Business and the fees the bank had to pay for numeral legal actions are the main reason for the increased debt. The sum includes £10 billion in legacy costs plus another £3.1 billion set ahead as an expected fine from the US authorities for the sale of mortgage-backed securities.

Williams & Glyn—the bank’s separate division that was supposed to look after 250,000 small business customers, 1,200 medium business customers and 1.8 million personal banking customers following the requirements of the European Commission (EC)—was canceled in August 2016. RBS stated that a new bank couldn’t survive independently and instead they will seek to sell the division to another bank. Earlier this month HM Treasury proposed that the bank should halt the idea of selling the division but instead focus on reformations and build competitive business services. Further ahead the EC reached a provisional agreement which will allow RBS to retain Williams & Glyn assets by investing £750 million into funding small and medium sized business (SME finance) in the next two years.

“The bottom-line loss we have reported today is, of course, disappointing but, given the scale of the legacy issues we worked through in 2016, it should not come as a surprise. These costs are a stark reminder of what happens to a bank when things go wrong and you lose focus on the customer, as this bank did before the financial crisis,” Ross McEwan, chief executive of RBS, announced.

Despite the dark clouds over the Bank’s current situation, McEwan stayed positive. He said his expectations are for RBS to be profitable by 2018, pointing out that the bank’s adjusted operating profit (the profits generated from a company’s core operations after subtracting the income taxes related to the core operations) is £4.2 billion. “We made good progress throughout 2016 against our strategy. This bank has great potential. We believe that by going further on cost reduction and faster on digital transformation we will deliver a simpler, safer and even more customer-focused bank,” McEwan said.

With today’s announcement, the total losses of RBS for the past nine years amount to £50 billion. Earlier in the morning today, in the stock exchange market the shares of RBS were trading at £2.46, twice less than April 2007, when they were trading at £5.78, but far better than the drop of February 2008, when a share traded at 23.8p.

The Royal Bank of Scotland Group plc (also known as RBS Group) is a British banking and insurance holding company, based in Edinburgh, Scotland. The group operates a wide variety of banking brands offering personal and business banking, private banking, insurance and corporate finance through its offices located in Europe, North America and Asia.