RBS warns of year of pain amid worse first-quarter loss

Royal Bank of Scotland warned that it faces a year of pain as a mammoth restructuring project and litigation costs responsible for a worse-than-expected first-quarter loss loom large over the rest of 2015.

The bank, which is majority-owned by the UK government, on Thursday reported a loss of £446m for the first quarter, a huge drop from the £1.2bn profit in the same period last year and worse than the £175.5m loss expected by analysts surveyed by Bloomberg.

Shares in RBS fell 2.72 per cent to 340p in early London trading.

"This is going to be another tough year as we refocus this bank," said Ross McEwan, chief executive. "There are still many conduct and litigation issues on the horizon; putting these issues behind us is a vital part of our plan."

Those conduct and litigation issues triggered £1.3bn of costs in the first quarter, as the bank set aside £856m to deal with foreign exchange market investigations among other litigation and conduct issues. Restructuring costs amounted to £453m as the bank undertakes a major plan launched in February to radically shrink the lender and focus on the UK.

Mr McEwan stressed that the losses were "very much planned" and that RBS was making good progress on its restructuring. Under the strategy, the bank will withdraw from 25 of the 38 countries in which it operates, reduce its balance sheet by £65bn and cut a "significant number" of employees in the investment bank.

RBS pulled out of the first of these countries, Kazakhstan, in the first quarter. The bank has sold several assets, including its global private banking arm Coutts International, and two North American corporate loan portfolios, collectively amounting to more than $40bn in loan commitments, to Mizuho Financial Group.

The sales have helped reduce total risk weighted assets from £355.9bn at the end of last year to £348.6bn at the end of March. The banks's capital buffer has also strengthened as a result, by 30 basis points over the quarter to 11.5 per cent.

Under moves to shrink the investment bank, RBS could reduce headcount by as many as 14,000 jobs in the unit, according to people familiar with the situation. Mr McEwan could not say how many employees would be cut as some might transfer as businesses are sold, as was the case with some of its recent disposals in the US.

The bank recently lost the head of its restructuring unit, Rory Cullinan, just weeks after the plan was announced. Mr McEwan said there had been a disagreement on the "implementation" of the strategy, but not on the plan itself.

The effects of the restructuring are already taking root.

Revenue in the investment bank fell 40 per cent year on year as RBS failed to benefit from the boom in trading activity that boosted peers in Europe, such as Credit Suisse and Deutsche Bank, as well as banks in the US.

"We do expect quarterly income for corporate and institutional banking to fall during the remainder of the year," said chief financial officer Ewen Stevenson, noting that RBS was allocating significantly less resources to the investment bank.

Mr McEwan said the recent recovery in market-wide trading revenues, which was driven by a surge in volatility in the first quarter, had not prompted a rethink of the bank's strategy. "We're very clear on the shape of the investment bank," he said.

The £856m in litigation and conduct expenses included £334m towards covering investigations into the alleged manipulation of foreign exchange markets. A further £100m cost was incurred to cover mis-selling of payment protection insurance, while the bank earmarked £257m for potential packaged accounts mis-selling.

The results come a day after Barclays reported that it had set aside a further £800m in the first quarter to cover foreign exchange litigation costs. The two banks are among a group of five expected to settle allegations that they rigged forex markets with the US Department of Justice and other regulators as soon as next month.

While RBS warned it faces a tough year of heavy restructuring and litigation costs, it also dangled the more distant promise that investors would be rewarded with dividends in the future.

Mr Stevenson said he was confident of hitting the bank's target of having a capital buffer over 13 per cent by next year, from which point RBS would become "a very capital generative bank".

"We do believe we're going to have excess capital over the next three years and we want to give that back to shareholders," he said.

However, he warned there were still obstacles to resuming dividend payments, including a final £1.3bn repayment of the dividend access share to the UK government that must be completed before it can return capital to investors.

Joseph Dickerson, analyst at Jefferies, said that if RBS completed its planned exit from its Citizens Financial subsidiary in the US it would already have a capital ratio above 14 per cent.

Mr McEwan said the clean-up would ultimately help the government sell its 80 per cent stake. "It's a much cleaner business that they'll be able to sell," he said, describing the future of RBS as "a really good UK-based franchise that has fantastic market positions".

Additional reporting by Martin Arnold

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