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RBS back in the black for first time in a decade
Royal Bank of Scotland clambered back into the black in 2017 for the first time in a decade, even though the taxpayer-owned bank took a hit in the fourth quarter from restructuring, litigation and conduct charges.
Total income of £13.1bn for 2017 was stronger than the £12.96bn City analysts expected and the fourth-quarter loss of £583m led to a full year operating profit of £2.2bn and a profit attributable to shareholders of £752m versus the huge £6.95bn loss the year before.
Net interest margin, a bank's crucial measure of the difference between lending and saving rates, was squeezed five basis points to 2.13% over the year but cost cutting was key to the return to profits, with adjusted operating expenses reduced by £810m or almost 10% on the previous year.
RBS still has some sizeable legacy issues hanging over it, with £760m of litigation and conduct costs paid in the fourth quarter but annual costs of this type of £1.3bn were a lot lower than the prior year. Payments in the year included charges and related provisions in the US from the mis-selling of residential mortgage-backed securities (RMBS), further provisions in relation to settling the 2008 rights issue shareholder litigation and an additional £175m PPI provision.
The balance sheet was strengthened significantly over the year, with the common equity tier-1 capital ratio increased by 250 basis points to 15.9%, despite the further legacy costs.
RBS expect to maintain a CET1 ratio in excess of its 13% target given the substantial additional charges and costs likely in the coming quarters, including a settlement with the US Department of Justice over RMBS, future potential pension contributions, risk-weighted asset inflation as a result of IFRS 16, Bank of England mortgage floors and Basel 3 amendments, and the collective impact of these items on its stress test results.
Chief executive Ross McEwan, about whom there have been rumours that he is being lined up for a move elsewhere, reiterate his medium term outlook for both return on tangible equity and the cost:income ratio.
"We also now intend to accelerate the transformation of the bank which necessitates increased investment and innovation spend together with additional restructuring costs. As a result operating costs, excluding restructuring and litigation and conduct costs, will reduce compared with 2017, but the rate of cost reduction will be materially lower than in 2017."
Expected restructuring charges are being increased from £1bn to around £2.5bn across 2018 to 2019, only a small amount of which related to the reintegration of the former Williams & Glyn business, with the majority of costs driven by costs associated with the accelerated transformation.
McEwan said the introduction of IFRS9 will be impairments are expected to be more volatile and RBS highlighted potential downside risks, and with the current high level of UK household debt and real wage compression, any increases in unemployment and interest rates present a threat to retail impairment rates.