RBS gains unsustainable

The government's general strategy towards RBS remains strangely uncertain. In June, for example, it ordered a review on whether RBS should be split into a 'good bank', containing the best assets, and a 'bad bank', containing the dross. The results are due soon, but such a split is thought likely to be dismissed - it would almost certainly require the full nationalisation of RBS's worst assets, which would increase the nation's already heavy debt burden. But that could force a showdown with the Parliamentary Commission on Banking Standards, which championed the idea, adding to the perception of drift. Meanwhile, RBS's shares trade well below the government's 502p-a-share average buy-in price, leaving a Lloyds-style disposal impossible without incurring a heavy taxpayer loss.

Then there's the burden of business misconduct charges. True, virtually all big UK banks have been hit with painful charges relating to such issues as payment protection insurance (PPI) mis-selling. But RBS set aside another £185m for PPI claims at the half-year stage, taking its total PPI charge to £2.4bn, while a further £435m was provided to cover "legal and regulatory investigations". There's also the emerging problem of interest rate product mis-selling compensation. An update this month from the Financial Conduct Authority revealed that RBS has 10,528 claims under review, which is more than all of the cases at HSBC (HSBA), Lloyds and Barclays (BARC) combined. Yet the bank's £0.75bn provision for this looks modest. "RBS appears the most likely bank to require material additional provisions," reckons analyst Ian Gordon of Investec Securities.

RBS' recovery is proving painfully slow, too. The UK retail arm grew half-year operating profit by just 4 per cent year on year to £954m, despite chatter about a firming UK economic recovery. The corporate business, meanwhile, saw operating profit tumble 25 per cent to £753m, and Ulster Bank suffered a £329m half-year loss. Investment bank downsizing also meant profits at the markets business slumped two-thirds at the half-year stage to £371m. Indeed, Investec expects a zero return on equity (RoE) for 2013 and doesn't expect RBS's RoE to exceed its cost of equity before 2017. There's still no dividend, either, and unlikely to be one for years, which compares with the fat 4.7 per cent prospective yield at HSBC, for example.

Capital adequacy is another concern. In June the Bank of England published figures revealing a hefty £13.6bn capital shortfall for RBS, based on a 7 per cent capital ratio and using Basel III criteria - the biggest shortfall in the sector. Admittedly, that's based on end-2102's figures and RBS reckons that actions since should bring that shortfall down to £0.4bn by end-2013. But the bank's Basel III core tier one capital ratio was just 8.7 per cent at the half-year stage, which was the weakest of the UK's main listed lenders and well behind that of HSBC's 10.1 per cent, or Standard Chartered's (STAN) 10.6 per cent.

Still, credit quality is improving and the group's half-year impairment charge fell 19 per cent to £2.15bn. RBS is also making progress with downsizing. Last October, for instance, it partially floated Direct Line and further share sales this month have taken RBS's stake to 28.5 per cent. And plans are on track to reduce the markets division's assets (weighted for risk) to £80bn by end-2014 (from £101bn at end-2012).