RBS still years from recovery

 
Tim Wallace
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■ Bank offloads £1bn stake in Direct Line
■ Set to slash costs as its losses mount
■ No return to profit expected until 2018

RBS will today launch a new plan to slash costs and re-focus on the UK in a bid to convince markets and the government it is at last on the path to profitability.

Analysts expect it to take up to 2018 for the bank to return to profitability – meaning it will have taken a full decade for the lender to recover from the credit crunch.

The bailed-out bank is forecast by analysts to report losses of more than £7bn for 2013, its worst year since the height of the financial crisis in 2008.

As part of its plan to slim down it last night announced the sale of the rest of its stake in insurer Direct Line.

The bank’s 423.2m shares give it a 28.2 per cent stake, which at last night’s closing price of 263p is worth £1.11bn.

During a three-hour event this morning for customers, staff and press, new boss Ross McEwan is expected to make drastic changes to the workforce and to sharply accelerate other reforms.

That is likely to include speeding up the sale of its US bank Citizens as well as cutting more investment banking operations. RBS is also expected to shed more branches and retail staff. Technological advances in the industry mean fewer customers visit branches, making room for cost cuts on the ground.

“This is a significant day for RBS – it will be recognition that after six years of heavy losses RBS is unable to grow its revenues to restore profitability and so has to take further very radical action to take costs out of the business,” said Investec analyst Ian Gordon. “In my view a return to profitability is not achievable until 2018.”

And JP Morgan’s Raul Sinha believes it could take until 2017 for RBS to fully focus on the high-return retail markets – leaving the bank at a sustained disadvantage relative to rival Lloyds.

“UK retail business generates 20 per cent plus return on total equity for UK banks and we estimate that by the end of 2016, UK retail will consume 35 per cent of Lloyds’ capital versus 15 per cent at RBS, post-investment bank rundown and the Citizens sale,” Sinha said. The Direct Line sale came after the insurer yesterday reported pre-tax profits for 2013 of £423.9m, up £174.8m from 2012.

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