5th Aug 2016 08:13
LONDON (Alliance News) - State-owned lender Royal Bank of Scotland Group PLC on Friday said it has ditched plans to spin-off its Williams & Glyn business and warned it may prove "more challenging" to meet the bank's targets for 2019.
RBS shares were down 4.4% to 183.5 pence on Friday morning, the worst performer in the FTSE 100.
RBS has so far spent GBP1.4 billion on creating a new IT platform to spin-out the Williams & Glyn small business lending arm. It has to spin-off or sell the business as a condition of its 2008 state bailout.
In April, RBS warned there was a "significant risk" that it would not complete the spin-out of Williams & Glyn by the deadline of the end of 2017. On Friday, it said that due to the complexities involved in separating the business and, while good progress had been made on the programme, the risks and costs inherent in spinning-off Williams & Glyn are such that "it would not be prudent to continue with this programme."
RBS said it will instead focus on alternative means to divest the Williams & Glyn business and said it has held talks with various parties, not named, about buying all or part of the Williams & Glyn business. Earlier this week, various media sources reported Santander UK, the British arm of Spanish giant Banco Santander SA, had made a bid to acquire Williams & Glyn.
The decision to abandon the spin-out plans at Williams & Glyn was compounded by RBS warning that Brexit has created "considerable uncertainty in our core market". With economic growth weak and interest rates also low, the latter exacerbated by the cut to the UK interest rate announced by the Bank of England on Thursday, RBS said hitting its cost-to-income ratio and return targets by 2019 will likely prove "more challenging".
The warning came after rival banks HSBC Holdings PLC and Standard Chartered PLC had both warned on meeting their return targets earlier this week
RBS, which is 73%-owned by the UK government, said it made an operating loss of GBP274.0 million in the half to the end of June, swung from a GBP261.0 million profit a year prior.
RBS's loss for the half, attributable to ordinary shareholders after its final dividend access payment, was GBP2.05 billion, compared to a GBP179.0 million loss a year before. This includes the dividend access payment, which amounted to GBP1.19 billion, plus GBP1.31 billion in litigation and conduct costs.
RBS said its adjusted operating profit for the half, which removes one-off costs along with litigation and conduct charges, was GBP1.16 billion, down from GBP2.89 billion a year before. Adjusted operating profit for the bank's Personal & Business Banking, Commercial & Private Banking and Corporate & Institutional Banking franchises fell 15% in the half and the profit was further hit by increased volatility losses.
RBS said its common equity tier 1 ratio was 14.5% at the end of June, still ahead of its 13.0% target. The CET1 ratio is a key measure of bank profitability and the ability of the lender to pay dividends.
The bank said it anticipates Personal & Business Banking and Commercial & Private Banking income will be broadly stable year-on-year in 2016. Strong planned balance sheet growth, particularly for mortgages but also in core commercial lending activity, will be offset by challenges coming from a reduction in interchange fees, low interest rates and an uncertain macroeconomic environment.
Income in Personal & Business Banking, Commercial & Private Banking was stable year-on-year in the first half, the company said. Income in Corporate & Institutional Banking recovered somewhat in the second quarter after a difficult first and income is due to be broadly flat for the full year.
In Personal & Business Banking, new mortgage lending in the first half was GBP14.7 billion and the group said it has seen good momentum in business banking and personal loans. Net lending in commercial banking grew GBP7.9 billion in the first half, 17% growth on an annualised basis.
RBS said it remains on track to deliver around GBP800.0 million in cost cuts across the business in 2016 and said it remains of the view that cost cutting will outpace any income declines across its operating divisions.
Restructuring costs are expected to remain high in 2016 and will likely be in excess of GBP1.00 billion, RBS said. It booked GBP630.0 million in charges in the first half, more than half of which was related to Williams & Glyn.
Capital Resolution, the unit created by RBS to house unwanted assets, delivered GBP368.0 million in losses in the first half, including an impairment charge booked on its shipping loan portfolio.
RBS anticipates further conduct-related provision may have to be booked in the second half, including regarding investigations into US residential mortgage-backed securities.
By Sam Unsted; [email protected]; @SamUAtAlliance
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