4 things RBS's results tell us about its future

 
Harriet Green
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Despite its ongoing efforts to deleverage and tighten its belt, RBS's results this morning were considerably weaker than expected.

Pre-tax loss came in at £8.2bn - a 25 per cent miss versus consensus - and the bank set aside £3.8bn for litigation and PPI mis-selling - one of the things that hit earnings.

The woeful results this morning have seen shares tumble almost nine per cent, and it's pretty obvious the lender's got a thorny path to tread.

A shock for markets

Marc Kimsey, senior trader at Accendo Markets says the selling pressure this morning is “immense” - “investors cannot get rid of their shares quick enough and traders are substantially adding to short positions.”

He thinks the latest update’s been a “shock” - although others have said the results weren't a huge surprise. “With the financial crisis so far behind us it is concerning to see company still in so much trouble.”

Closures and disposals

RBS announced that, with a 30 per cent decline in branch usage since 2012, it'll "have less of them over time".

It has had to offload the rest of its interest in Direct Line, which it announced yesterday, and is looking to float its US business Citizens Bank and Williams & Glyn, its UK retail business.

Ishaq Siddiqi of ETX Capital says:

RBS is now looking to speed up the process of these disposals to raise capital or else be punished by the market for its inability to turnaround. UK politicians will have a tougher time with RBS as today’s figures clearly suggest the bank is far from privatisation – a move that the government were hoping to pull before next year’s general elections.

Privatisation

McEwan has said the bank needs to recognise that it's not yet strong enough to be privatised at a profit for the taxpayer. The state-rescue lender has confirmed that all of the £46bn injected into the bank by the state six years ago has been used paying for losses.

Siddiqi emphasises that, while bonuses have gone down 15 per cent to £576m, that's still a huge amount to reward senior staff "who have thus far failed to stay on track of strategy and have been ill-prepared for selling off the government’s stake in the bank."

The announcement about downsizing the business and separating it into three sections is an appeasement measure, he added.

Returns

The banking and management group Investec said that, while today’s strategic review has a lot of sensible measures in it - like targeting a medium-term cost save of £5.3bn - the provision for PPI redress and regulatory/legal costs are light, and we should “expect more catch up” this year.

The firm thinks RBS “may yet be capable” of delivering Return on Equity above Cost of Equity in 2018, “but certainly not before”.

It has a ‘sell’ recommendation on stock, and a price target of 354p, which it’s currently reviewing.

Market have "lost trust" in restructuring strategies that keep failing, said Siddiqi. RBS has had "chance after chance", yet it's still failed to turn a profit. This means McEwan's right - privatisation is still a long way off.

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