Royal Bank of Scotland is braced for potential renewed losses in 2018 due to an impending mammoth settlement with the US Department of Justice (DoJ) despite the bank reporting its first annual pre-tax profit in a decade.
RBS yesterday posted a profit of £752 million for 2017, turning around a £6.95bn loss that the taxpayer-backed lender made a year earlier.
The return to the black came after the bank had made total losses of more than £58bn since its government bailout in 2008 – the year it slumped to a British corporate record loss of £24bn.
Unveiling the return to profitability yesterday, RBS chief executive Ross McEwan said: “This is as you can imagine a symbolic moment for this bank.”
McEwan also hinted at a resumption of dividends at the group in the future following the much better financial performance. “The prospect of us returning any capital to our shareholders is getting closer,” he said.
However, City banking analysts warned that RBS, which is still 72 per cent-owned by the taxpayer, has yet to reach what is expected to be a massive financial settlement with the US DoJ over selling risky mortgage-backed securities in the run-up to the financial crash. The City believes that could tumble the bank back into the red this year.
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City forecasts for the US legacy issue settlement range widely, from $3 billion to $18bn (£2.1bn-£13bn). Laith Khalaf, senior analyst at broker Hargreaves Lansdown, said: “RBS has broken its ten year duck and managed to squeeze out a profit in 2017, thanks in large part to a big fall in litigation and conduct costs.
“This is a stay of execution rather than a pardon, however, because the bank is still facing a multi-billion dollar penalty from the US Department of Justice, which is now going to impair profitability in 2018.”
Michael Hewson, chief market analyst at CMC Markets UK, commented: “Royal Bank of Scotland (has) finally been able to report an annual profit, but while this makes a good headline the only reason they were able to do so was because the ongoing issue with the US DoJ remains unresolved.
“The bank did set aside another $1bn in respect of litigation provision in Q4, with $650m of that going towards the DoJ case, taking the overall provision so far to $4.4bn, but that still leaves it well short of what the total bill might be.”
McEwan acknowledged on a conference call with reporters that the figures for 2018 are likely to hinge on the decision by the DoJ – the timing of which he said was “not in our control.
“Our results in 2018 are somewhat dependent upon the settlement with the DOJ, which we hope will happen. When it does come, you know, it will have a major impact on our numbers depending on its size. But if you have a look at the underlying profitability of this bank, it is very good”.
The prospect of the looming American fine took the gloss off RBS’s return to profitability, with shares on the stock market closing down nearly 5 per cent at 268.4p.
That is still well adrift of the taxpayer’s buy-in price of up to £5, and analysts said as and when the government began selling down the stake again it would put further pressure on the price.
One RBS-follower said: “Indeed, with the price now standing at around half of the government’s breakeven point, the taxpayer is still going to come out of this nursing a significant loss.”
The bank has charged ahead with its cost-cutting drive and restructuring plan, having cut expenses by £810m last year – exceeding its £750m target.
McEwan said the bank will see a rise in restructuring costs - totalling around £2.5bn across 2018 and 2019 - and will increase its focus on digitalisation, including artificial intelligence.
However, while saying a branch offering remained important to the group, he refused to rule out further branch closures or job losses.
He said: “One the issue of digitalisation, you’ll recall in the last four to five years I’ve never given what the impact on our headcount (is). I have the conversations with our staff before I tell any media about that and I’m not changing this year.
“But you know we are digitalising the bank, that is what is happening globally in financial services.”
In its UK personal and business banking division alone, RBS reported an 8 per cent fall in headcount in 2017, while its commercial banking unit saw front office headcount fall around 16 per cent, alongside an 11 per cent drop in its private banking business.
RBS’s annual report, published alongside the results, showed that McEwan’s total pay package fell to £3.49m from £3.7m in 2016 following a decrease in his benefits and long-term incentives.
The lender’s overall bonus pool fell £1m to £342m.
Alistair Darling, the chancellor in 2008, has told how RBS warned him it only had “two or three hours” before its cash machines ran out, which would have sparked economic and social “collapse”.
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