Wednesday, January 27, 2016
RBS is still a mess but it's better that taxpayers hold onto it for now
The Royal Bank of Scotland unleashed a horrendous market update – warning it would take a £2.5 billion ($3.6 billion) hit.
The bank is paying out on legal bills and extra provisions for misselling, writedowns on its private bank and make some huge changes to its pensions scheme.
The bad news is probably going to get even worse for RBS.
The bank's CEO, Ross Ewan, and CFO Ewan Stevenson made it clear on a call with press that "I wouldn't read anything into this statement that we are close to settling with US authorities."
In other words, none of this multi-billion pound provision covers the US authorities' potential charges so therefore there could be a another huge hit in the future.
S0, it makes more sense for taxpayers to hang onto the government-owned bank for longer.
All in all, the bank admitted on a conference call with journalists and analysts this morning that it will make a loss for 2015. RBS CEO Ross McEwan was also bedgrudgingly put on the spot by journalists to name the last time RBS made a full year profit and not a loss — he took a guess and said around six to seven years ago.
Around seven years ago, RBS had to beg the government for a bailout. Over 2008 and 2009 it borrowed £45.4 billion ($70.1 billion), worth 500p per share, from the taxpayer and it has yet to pay it back. The government originally owned 83% in the bank and it currently still owns 73% of RBS.
"I am determined to put the issues of the past behind us, and make sure RBS is a stronger, safer bank," said McEwan on the call. "We now have the financial strength to deal with this. We said 2015 and 2016 would tidying up these legacy issues."
The share price immediately tanked in the market open, although it has made a slight recovery to be only down around 1.5%. However, overall the stock is down over 32% this year. The share price is around 256.70p.
It is a distinct possibility that the share price could crater again, if RBS announces further provisions for litigation settlements that relate to the US authorities or even another scandal we haven't heard of as of yet.
RBS is on shaky ground, after all, it almost failed the Bank of England's 2015 stress tests.
It's hard not to compare RBS and other British bank Lloyds, making RBS being the slower and underachieving cousin.
The government was forced to pump £20.5 billion ($32 billion) into Lloyds at the height of the financial crisis in 2008 and 2009. Shares in the struggling lender were bought at an average price of 63.1 p when fees are factored in. The government is also going to sell a £2 billion ($3 billion) slice of its remaining 11.98% stake in the bank to retail investors in the spring.
The seemingly speedy privatisation of Lloyds has made the public view RBS as a poisoned chalice and that we should offload it as soon as possible. This is a terrible idea.
Last summer, UK Chancellor George Osborne sold off a chunk of RBS shares for around 330p per share. He made a £1 billion loss and was heavily criticised by politicians and the public for bringing the taxpayer stake down to 73%.
The former shadow chancellor Chris Leslie said at the time “getting back the taxpayers’ money is not an impossible objective and the chancellor is dismissing this too lightly."
Despite pressure to move RBS back into the private sector, selling shares now would be the wrong move — especially if it hasn't solved its "legacy issues" around misselling mortgage backed securities. And as stated above — US authorities lawsuits regarding the same kind of products.
It also added an extra £500 million to pay for the mis-selling of payment protection insurance, bringing the bank's tota PPI provisions pot to £4.3 billion. PPI was misleadingly sold alongside loans, credit cards and mortgages, and banks have been forced to pay back customers who were wrongly persuaded to take the coverage.
The deadline for claims isn't until 2018. We have a long way to go. The PPI mis-selling scandal has now cost the banking industry around £26 billion ($40 billion) in compensation payments and admin fees and that number has risen with RBS' additional provision.
On top of that Joseph Dickerson, equity analyst at Jefferies said in a note this morning "the pension change was something new and unfriendly near-term."
Most importantly, Jefferies pointed out that it is best, for investors to "buy" the stock now, as once all the issues are somewhat sorted, the RBS target price is at 482.00p. This is way above Osborne's 330p sell-off and near to the original price taxpayers bailed out the bank at.
We've got a long way to go until RBS sorts itself out and until it can properly put to bed the myriad "legacy issues" there is no point in rushing a privatisation because the only people that will seriously lose out will be the taxpayer and the customers the bank serves.