The RBS quarterly profit report this week is the first to show the Royal Bank of Scotland out of the red since 2015. The report for the first quarter of 2017 showed the bank to have made £259 million profit. This is the first quarterly profit since the third quarter of 2015. This compares to a reported loss of £968 million in the first quarter of 2016. The profit report resulted in RBS shares opening almost 4% up.
Total losses for 2016 were £7 billion, after which Chief Executive Ross McEwan ordered a £2 billion 4-year cost-cutting initiative. This year’s part of this planned reduction in costs totaled £750 million, and this week’s report shows that the company has already completed 37% of that. That is well ahead of schedule. Ross McEwan stated that this plan would unavoidably involve job losses and branch closures.
Although closing branches will save money, such savings are also driven by the changing function of branches in today’s world. Increasing numbers of people are switching to online accounts, with the result that branch activity is rapidly decreasing. An ATM can dispense cash, provide balances and details of recent transactions and many can also accept deposits in the form of cash or checks.
That said, the RBS had allocated £5.9 billion for potential legal costs and fines. This relates to issues such as the sale of securities backed by subprime mortgages in the years before the 2008 financial crisis. The US Department of Justice is behind this litigation and a significant fine is expected.
Before the UK government can sell its 72% stake in the RBS, all such litigation must first be settled. This stake relates to the £45.5 billion bail-out paid by the UK government to help the Royal Bank of Scotland through the financial crisis. The RBS also has to set aside cash for repayments and legal costs relating to mis-sold Payment Protection Insurance (PPI).
Another issue the bank has to hurdle is the Williams & Glynn problem. The European Union regulations require the RBS to sell this unit. It has been looking for 7 years for a potential buyer. A potential solution to this issue is that the UK government is contacting the EU commission regarding this problem. This relates to a plan involving the Royal Bank of Scotland taking steps to make such smaller bank units more competitive. On Friday, however, the RBS could provide no update on this potential solution.
When all of the above has been taken into account, it seems as though the RBS is arising from the ashes in a stronger and more financially stable position than was evident just a few months ago. Nevertheless, questions are still being asked. How can the bank invest in IT at a level required for a modern-day bank? How sustainable would such a level of reduction in branches and staff be?
We shall no doubt find the answers to these questions over the next few months. Meantime, the RBS quarterly profit report is looking good and bodes well for the future of the Royal Bank of Scotland.
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