Friday 28 October 2016 11:26 am

Persistent headaches: Five problems facing RBS chief exec Ross McEwan

Ross McEwan may have been pleasantly surprised as he peaked through his fingers to see what had happened to the Royal Bank of Scotland's (RBS) share price this morning.

Read more: RBS shares jump up and down to the noise of loss-making quarter

Unfortunately for the chief exec of RBS, an initial jump of five per cent wobbled and fell backwards. Shares are currently down one per cent.

[stockChart code="RBS" date="2016-10-28 10:55"]

Jasper Lawler, an analyst at CMC, summed up the situation: "The underlying bank is looking a lot sounder but a never-ending trail of legacy fines and the low rates environment mean it’ll probably be a number of years before RBS is not a tax-payer backed bank."

Indeed, as Ken Odeluga of City Index points out: "The attributable loss (£469m) was contained well below the wider expectation of c.£900m". But he continues with downbeat summary of his own: "The group’s seemingly intractable problems are barely any closer to resolution."

Here's five things that will trouble McEwan in the wake of yet another loss-making quarterly announcement.

1. Ampersands

Two letters and an ampersand – it sounds quite cool can be pretty successful: L&G, H&M, AT&T (ok, that’s three), D&G.

But there's another one, W&G, – Williams & Glyn – which is really hurting RBS.

RBS was told to flog its 300-branch subsidiary by the end of 2017 in order to comply with European Commission bail-out terms. However, it is facing two key problems.

Read more: Challenger bank CYBG confirms Williams & Glyn takeover talks

First, RBS has shelled out hundreds of millions getting W&G ready for sale, only to realise it actually needs to spend even more. So today, RBS announced it had been billed £120m just to terminate the plans to spend hundreds more millions… clear as mud?

Secondly there's the fact no-one wants to buy all of W&G. And this is going to mean the government may need to trip over to Brussels to discuss this.

None of the proposals [offers to buy W&G] under discussion can deliver full separation and divestment by 31 December 2017. RBS is therefore in discussion with HM Treasury, and expects further engagement with the European Commission, to agree a solution with regards to its State Aid obligations.

2. Litigation and the USA

During the third quarter, RBS said it had managed to settle some of its outstanding US litigation.

“Litigation and conduct costs of £425m include an additional charge in respect of the recent settlement with the National Credit Union Administration Board to resolve two outstanding lawsuits in the United States relating to residential mortgage backed securities.”

But to quote Franklin D Roosevelt, “the only thing we have to fear is fear itself”. Investors’ main fear is the fact there is no way of knowing what else will creep out of the woodwork.

We continue to deal with a range of uncertainties in the external environment and also manage conduct-related investigations and litigation, including US RMBS [retail mortgage-backed securities]. Substantial additional charges and costs may be recognised in the coming quarters which would have an impact on the group’s level of capital.

George Salmon, an analyst at Hargreaves Lansdown warned: "While investors are none the wiser as to what the exact RMBS fine will be, it’s going to be a sizeable sum."

"Lack of insight offered into US mortgage investigation, underlines [that] provisioning remains grim," added City Index's Odeluga.

3. RBS employees aren’t happy. At least it seems that way…

Management speak is always hard to decipher. But it appears RBS is missing its target of keeping its staff happy.

Read more: RBS to slash 200 UK jobs and shut branches

RBS had a target to “raise employee engagement to within two points of the GFS norm”.

So far this year, the bank is fairly well off this target. It announced that it is “down three points to within six points of GFS norm”. Whatever the GFS norm is…

4. It ain’t our fault, guv…

The new norm of low interest rates is stifling growth at many lenders. But it's especially bad for RBS, as it is desperate trying to make up lost ground.

Read more: Investors more worried about lower for longer interest rates than Brexit

Right at the top of its “outlook” section, RBS had to admit the following:

The current low interest rate and low growth environment presents a range of uncertainties which could impact the performance of our core business.

While we remain committed to achieving our long term cost:income ratio and returns targets, set out in 2014, we now do not expect to achieve these by 2019 as previously indicated. 

"While the results themselves were better than expected, guidance on the outlook is more disappointing," summarised Gary Greenwood of Shore Capital Markets.

5. Billions in subsidiary write-downs

RBS has written down the value of some of the companies it owns by a mammoth £6bn, which means distributable reserves are almost halved to £7.2bn.

The good news is, RBS said that this won’t make a huge difference on the bank’s ability pay whomever it has to pay:

While this level of distributable reserves does not impact upon our ability to pay coupons on existing securities, it is our intention to implement a capital reorganisation in 2017 in order to increase parent company distributable reserves, providing greater flexibility for future distributions and preference share redemptions.