30th Apr 2015 09:33
LONDON (Alliance News) - Royal Bank of Scotland Group PLC Thursday said it swung to a first-quarter net loss, as revenue fell and operating expenses rose due to GBP856 million in litigation and conduct costs and GBP453 million in restructuring costs.
RBS is undergoing a painful restructuring. The UK government still owns about 80% of the bank after rescuing it with a GBP45 billion bailout during the global financial crisis of 2007-09.
Although still regarded as a global systemically important bank by international regulators, the lender is cutting its international presence and focusing on its customers in the UK. The group is accelerating the restructuring of its corporate and institutional bank, after revealing in February that it will no longer operate a standalone global investment bank.
In a statement, RBS said it made a GBP446 million net loss in the three months ended March 31, compared with a net profit of GBP1.20 billion in the corresponding quarter of the prior year.
"It will be a tough year," Chief Executive Ross McEwan told reporters.
Pretax profit fell to GBP53 million from GBP1.49 billion, as revenue fell to GBP4.33 billion from GBP5.05 billion and operating expenses increased to GBP4.10 billion from GBP3.41 billion. One measure of operating profit fell to GBP325 million from GBP1.28 billion.
"The key problem remains that income is falling faster than costs," Investec banking analyst Ian Gordon said in a note to clients.
Within the operating expenses, the costs of restructuring increased to GBP453 million from GBP129 million, largely due to the writdown of the value of its US premises, while the litigation and conduct costs hurt the comparison against the corresponding quarter of 2014 because no such provisions were made in that period.
Its litigation and conduct costs included GBP334 million in connection with foreign exchange investigation and litigation, adding to the GBP320 million provision already in place at the beginning of 2015, GBP257 million for customer redress relating to investment advice and packaged accounts, GBP100 million for compensating customers who were mis-sold insurance. In addition, a provision for litigation related to the issuance of mortgage-backed securities in the US before the financial crisis increased by GBP176 million to GBP2.05 billion.
RBS said it is in talks with authorities over failings in its foreign exchange businesses within its corporate and institutional bank, including "advanced settlement discussions" over the criminal investigation being conducted by the US Department of Justice and with other regulators.
The foreign exchange provision comes after an agreement in November 2014 under which RBS paid USD290 million to the US Commodity Futures Trading Commission and GBP217 million to the UK Financial Conduct Authority over the foreign-exchange scandal.
Speaking to reporters, McEwan said he expects a settlement with US regulators at some stage in the second quarter over the foreign exchange investigation, while a possible settlement for mortgage-backed securities could follow in the second half of the year.
The group's personal and business banking division's operating profit fell to GBP399 million from GBP519 million, while the operating profit of its commercial and private bank increased to GBP440 million from GBP396 million.
Its corporate and institutional banking division swung to an operating loss of GBP741 million in the quarter, compared with a GBP333 million operating profit in the corresponding three months of 2014, amid the restructuring.
RBS said it made progress on improving its common equity tier one ratio, a key measure of financial strength for a bank, which increased to 11.5% on March 31 from 11.2% at the end of 2014. The group said it is on track to meet its targets in 2015.
It has a target of moving towards a CET1 ratio of 13%, a key threshold for the bank as it wants to return all capital above that level to shareholders, although that intention would require approval from regulators and would be made only in the event that the bank feels enough of its conduct issues are in the past.
"The critical metric for us going into results was the CET1 ratio," Jefferies equity analyst Joseph Dickerson wrote in a note to clients. Dickerson noted that the ratio increased even though RBS made a net loss in the quarter.
RBS must also pay a further GBP1.18 billion to retire the dividend access share, which was issued to the government in 2009 as part of the bank's rescue, if it is to resume dividend payments in the future. The bank has already paid GBP320 million towards retiring the dividend access share.
RBS shares were down 2.2% at 341.80 pence on Thursday.
By Samuel Agini; [email protected]; @samuelagini
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