Losses at Royal Bank of Scotland have widened more than expected in the first quarter of 2016, as the bank confirmed it will have to consider alternatives for its plan to offload William & Glyn.
Shares dropped by more than two per cent to 239p in response to the news.
RBS made an attributable loss of £968m in the three month period - worse than expected and around double the £459m loss chalked up during the same period last year.
The state-owned bank suffered volatility losses of £356m, restructuring costs of £238m and an impairment charge of £223m, largely related to its shipping portfolio.
It also includes payment of £1.2bn to the government to cancel its "dividend access share" - a block on payments to ordinary shareholders.
However, operating profit leaped from £37m in 2015 to £421m this year. Adjusted operating profit slumped to £440m from £1.36bn primarily because of Capital Resolution - which reported an operating loss of £377m compared with a profit of £143m last year - and the IFRS volatility charge.
Adjusted operating profit at RBS' private banking division slumped by 40 per cent to £26m.
In RBS' UK personal and business banking arm (UK PBB) adjusted operating profit fell nine per cent to £531m. Total income fell by three per cent "reflecting margin pressure and reduced fee income", but was two per cent higher than in the last quarter of 2015.
Its commercial banking arm fared better, with adjusted operating profit up seven per cent to £403m, while the international business was stable at £53m.
Why it's interesting
As with so many banks, RBS is part way through a major turnaround plan, which has so far resulted in the loss of hundreds of jobs, and today's results show the bank is still struggling with its legacy issues.
It was forecast to post losses of £957m - the fact it has posted worse-than-expected results will no doubt be pounced upon by many, not least because other banks, such as Lloyds, have actually fared better than was tipped. Even Standard Chartered gave investors something to cheer this week.
Beyond the core performance of the business, the City will also be paying attention to the ongoing William & Glyn saga, which has taken another turn. Last night it said there was "a significant risk" it will fail to meet its 2017 deadline for the disposal, adding that costs would be much higher than expected.
What RBS said
The bank has warned that although there are some areas of strength - particularly in mortgages but also in commercial lending - there are black clouds on the horizon in the form of low interest rates and the uncertain macroeconomic environment.
Restructuring costs are expected to remain "high" in 2016, RBS admitted - more than £1bn, in fact.
However, RBS remains "on track to achieve an £800m cost reduction in 2016 after achieving a £189m reduction in the first quarter".
"We retain our expectation that cost reduction will exceed any income erosion across our combined core businesses. We will incur a charge of approximately £50m respect of the Financial Services Compensation Scheme (FSCS) levy in our Q2 2016 results."
The bank added: "We anticipate a modest net impairment charge for the year in our core franchises. The impairment charge taken in the quarter largely related to the shipping portfolio and we continue to anticipate additional net impairments in the Capital Resolution business. We also recognise the increased risk of large single name events across our portfolios given the uncertain macroeconomic environment.
"We expect Capital Resolution disposal losses of approximately £1.5bn over the period 2015-19, and we anticipate that we will incur most of the remaining losses in 2016 (2015 - £367m).
"We continue to deal with a range of uncertainties in the external environment, not least those caused by the forthcoming referendum on the UK's continuing membership of the European Union. We will also have to manage conduct-related investigations and litigation, including US RMBS, throughout 2016, and substantial related incremental provisions may be recognised during the year."
What analysts said
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "Royal Bank of Scotland has announced a rather tepid set of results, though in the circumstances investors will probably be happy they aren’t taking a cold bath.
"The bank’s income remains steady in challenging conditions, and thanks to a big drop in litigation costs, the underlying business returned to profitability. However the small matter of a £1.2bn repayment to the government tipped the bank deep into the red overall.
"As far as litigation is concerned, RBS is far from out of the woods. A ruling from US regulators is still pending over the bank’s mis-selling of mortgage-backed securities. RBS has already set aside substantial provisions for the expected costs to come, but today warned that more will be needed.
"The bank noted significant growth in its mortgage book in the first quarter, boosted by landlords rushing to beat higher rates of stamp duty which came into effect in April - this fillip to the lending market won’t be repeated in the coming quarter.
"The bank confirmed it is behind schedule with its divestment of Williams and Glyn, and this announcement totally overshadows the bank’s results. The delay of the spin-off kicks dividend payments into the long grass, and probably means investors will have endured a decade-long dividend drought before the bank starts making payments again."
A weak set of first quarter results and more dark clouds on the horizon for RBS.