RBS puts its faith in change

Admittedly, a good portion of that pain reflected redress and financial crisis-related legacy issues. For instance, the loss included a £4.8bn hit from impairments relating to the establishment of an internal ‘bad bank’, called RBS Capital Resolution, where its grimmest legacy assets are held. There are also provisions for customer redress, including £900m in 2013 for PPI compensation, bringing the cumulative total to £3.1bn. A £550m charge for mis-selling interest-rate hedges in 2013 didn’t help, either, bringing the total to £1.25bn. Total regulatory and redress provision reached £3.8bn last year and further pain can’t be ruled out. “We continue to regard elements of RBS’ reserving as light,” reckons analyst Ian Gordon of broker Investec Securities.

But even after ignoring RBS’s long list of exceptionals, underlying operating profit still fell 15 per cent in 2013 to £2.5bn. In his efforts to tackle that weak performance, Mr McEwan has focused on costs. The bank’s cost to income ratio reached a heavy 73 per cent in 2013, compared to 53 per cent for Lloyds’ (LLOY). Mr McEwan is now targeting a 50 per cent ratio in the long term. To achieve that, he’s aiming to hack away £5bn of costs by 2017, with £1bn of savings targeted by the end of this year. Job losses appear inevitable, though Mr McEwan wouldn’t be drawn on numbers.

He’s also looking to refocus the bank back onto the UK and away from investment bank-style activities. That involves cutting the current seven divisions down to three: personal and business banking, commercial and private banking and corporate and institutional banking.

But reaching these goals won’t be easy and “comes with significant execution risks and cost,” note analysts at Deutsche Bank. RBS expects to incur £5bn of restructuring costs over the period to 2017. “We are sceptical of there being a lot of low-hanging fruit in the cost-savings department, given £7bn in restructuring charges taken under previous management,” adds Deutsche. Indeed, Deutsche reckons that saving will most likely have to come from “curtailed operations” and heavy IT investment - all of which will hit the group’s net tangible assets (NTA). Last year NTA fell to 363p from 446p in 2012.

Capital adequacy remains a worry, too. RBS’s core tier-one capital ratio on a Basel III basis reached just 8.6 per cent - better than management’s earlier guidance of 8.1-8.5 per cent, but still the weakest of its UK peers. Management expects to improve the position largely by reducing risk-weighted assets (and so the need to hold capital against them) and floating off Williams & Glyn and the Citizens US arm. Citizens’ IPO is expected by the year-end, and management reckons it could add 200-300 basis points to the capital ratio. But with a targeted ratio of around 11 per cent by end-2015, not everyone is convinced these efforts will be enough. “Expect some further equity issuance in 2014,” reckons Mr Gordon.

Neither could Mr McEwan shed any light on the reprivatisation timetable. He reckons that’s a matter for the government and that his priority is simply to build a bank that people can trust again. That, too, could take time: “we’re the least trusted bank in the least trusted sector of the market,” he admits. His efforts may not be helped by RBS’s decision to pay out £576m in bonuses this year - though that was down 15 per cent on last year. Mr McEwan makes no apologies for paying market rates: “we need to be there or thereabouts” to “keep people engaged".