RBS a long way from being investable says the Share Centre

5th August 2016

RBS has posted a loss of £2bn for the first half of the year with the chief executive Ross McEwan blaming legacy issues. It compares to a £179m loss last year and includes £1.3bn of litigation and conduct costs.

The bank also confirmed that it would no longer separate and list its Williams & Glyn business. It will now sell the 300-branch High Street bank.

The loss was largely due to a £1,193 billion special dividend payment to the government owed from its bailout, and £1,315 million of conduct costs, including PPI provisions. The legacy issues also include litigation related to a £12bn rights issue in 2008 during the financial crisis but also legal issues regarding the sale of mortgage backed securities in the US prior to the onset of the financial crisis.

The bank set aside a further £450 million provision for PPI in the first half of 2016, taking the total cost to the bank up to £4.7 billion.

Helal Miah, investment research analyst at The Share Centre says: “The woes at the Royal Bank of Scotland seem to continue which is reflected in the half year results reported this morning, as the group stated a loss of just over £2bn over the period.

“Investors should note that most of these losses are as a result of it earmarking £1.4bn for law suits and fines whilst £450m of this amount has been set aside for PPI misspelling.

“As well as this, shareholders are suing the company for allegedly misleading them over a rights issue in 2008. No settlement has been reached here but the bank is setting aside £750m.

“Outside of misconduct charges it has incurred restructuring charges of £392m and has, for the time being, ditched plans to separate Williams & Glyn as a standalone bank as creating a separate IT system is proving difficult.

“This latest set of results demonstrates that RBS is still a long way away from being investable. The business is still too complicated, its balance sheet is hard to understand and there are too many ongoing litigation and compensation claims. It must selloff Williams and Glyn soon as part of the EU bailout conditions and it will not be able to pay a dividend before that. However, investors should note that RBS does not seem in a position to pay a dividend for a while anyway.

“With interest rates in the UK falling to new record levels, it is even harder for banks to generate attractive profit levels. RBS is the least attractive amongst the UK listed banks and we don’t see any reason to change our ‘sell’ recommendation. For those interested in the sector, our preference is HSBC due to it being viewed as more conservatively managed with a superior balance sheet and deposits.”

Laith Khalaf, senior analyst, Hargreaves Lansdown says: “RBS has been pushed deep into the red by the costs of former misconduct, chief amongst them PPI compensation, which still casts a long shadow on the UK banking sector. The bank is also bracing itself for the huge costs stemming from a swathe of US litigation for mis-selling mortgage-backed securities in the run up to the financial crisis.

“RBS looks to be taking a sharp turn in its plans to spin off Williams and Glyn, which now appear to be more focused on finding a buyer for the new challenger bank. If they can find a willing counterparty, this could remove a major distraction for RBS, which will let it concentrate on restructuring and simplifying its business.

“Mark Carney’s new cheap lending scheme will help UK banking margins in a falling interest rate environment, though it remains to be seen to what extent the banks play ball in passing lower rates on to borrowers, and indeed what demand there is for further lines of credit against a weakening economic backdrop. Low interest rates and a slowing economy are not good news for the UK banking sector, though RBS is relatively well capitalised, so barring an extreme systemic shock, its issue is one of profitability rather than solvency.”

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