London: Royal Bank of Scotland (RBS) Group, Britain’s largest taxpayer-owned lender, posted a larger loss than estimated in the second quarter as it set aside more money to cover a lawsuit over its 2008 share sale.
The net loss of 1.08 billion pounds ($1.4 billion) compared with a 280 million-pound profit a year earlier, the Edinburgh-based lender said in a statement on Friday. That’s bigger than the 247 million-pound loss average estimate of 11 analysts in a company-compiled survey, driven by 1.28 billion pounds of conduct and litigation charges, mostly tied to the rights issue lawsuit and a further provision for the payment protection insurance scandal.
Chief Executive Officer Ross McEwan is halfway through a five-year plan to shrink the former global titan into a domestic lender, just as the UK economy shows signs of slowing after Britain voted to leave the European Union. The bank said on Friday that it may not reach its 2019 goals and was abandoning a plan to set up its Williams & Glyn consumer bank as a standalone business after spending 1.4 billion pounds on the project.
"As is typical with us at the moment while we’re in the middle of a quite intensive restructuring period, we again saw some pretty substantive conduct provisions taken today,” Chief Financial Officer Ewen Stevenson said in an interview with Manus Cranny on Bloomberg Television.
The bank’s shares fell 5.1 per cent at 8:09am in London.
The Bank of England’s rate cut on Thursday threatens to undermine profitability at RBS by further squeezing the bank’s net interest margin, the difference between income from lending and borrowing costs, after several years of low rates. HSBC Holdings said on Wednesday that a 25 basis point cut would eliminate about $100 million of net interest income in 2016. RBS’s net interest margin was 2.21 per cent in the second quarter, up from 2.13 per cent a year earlier.
The bank will look at its ability to pass on the rate cut to borrowers and will be "fair and reasonable,” Stevenson said. He said the bank is also dealing with less demand for loans after the Brexit vote.
"There’s definitely a slowdown going on,” Stevenson said. "We’ve seen for some time a slowdown amongst our corporate customer base, stalling decisions to invest in people, invest in plants, that’s continued after the referendum vote.”
RBS is the worst performing major British lender this year, declining 36 per cent before today as the stock plunged following the Brexit vote. It’s unclear when the UK government will reduce its 72 per cent stake in the bank as it trades below the 407 pence a share at which taxpayers would break even on the state’s 2008 and 2009 investment.
RBS took the provision to cover a potential settlement arising from a lawsuit linked to its emergency 2008 rights issue, undertaken by former CEO Fred Goodwin in a last-ditch attempt to rescue the lender before its taxpayer bailout. The bank entered settlement talks with shareholders that subscribed to about 4 billion pounds of the rights issue last month, leading it to take the provision. RBS is due to go to court over the case early next year.
RBS took a further 450 million pound hit for mis-sold payment protection insurance in the second quarter to cover it up to the end of June 2019 after the UK’s Financial Conduct Authority delayed the introduction of a time limit on consumer complaints.
Williams & Glyn
RBS said it would focus on a sale of Williams & Glyn to another company after having "positive discussions” with a number of potential buyers. RBS received a formal bid for the business from Banco Santander this week, marking the second time the Spanish lender has tried to acquire the business, people with knowledge of the matter have said.
The bank is above its target of a 13 per cent common equity Tier 1 ratio required to return any excess capital to investors. Before it can make a payout, it must dispose of Williams & Glyn, complete the bulk of its restructuring, reach a settlement in the US mortgage probe and pass Bank of England stress tests later this year.
Pretax profit excluding restructuring costs and the conduct and litigation charges was 716 million pounds, down from 1.54 billion pounds a year ago. The firm’s common equity Tier 1 ratio, a measure of financial strength, fell to 14.5 percent at the end of the second quarter from 15.5 per cent at the end of December.
The investment-banking division reported an operating profit of 109 million pounds in the quarter, compared with a loss of 204 million pounds in year-earlier period.