RBS squeezes investment banking

But, like the measures of economic slack due to trigger interest-rate increases at the Bank of England, RBS’s targets are hard to pin down. Chief executive Ross McEwan increased the company’s key regulatory capital target to 13 per cent alongside its annual results (from 12 per cent by the end of 2016). At least the path is encouraging: the bank finished last year with capital of 11.2 per cent, well up from 8.6 per cent in 2013.

Litigation and redress costs also remain stubbornly high, at £2.2bn, with no obvious end in sight. Provisions against PPI claims will naturally hog the UK headlines – these totalled £650m last year – but management seems more worried about the trajectory of claims relating to the mis-selling of mortgage-backed securities in the US.

New finance director Ewen Stevenson said on a call with journalists that the company was making an “unambiguous” commitment to return capital – but admitted the timing was uncertain. Most analysts see 2016 as the year when dividends will restart, but the results statement seemed designed to stress the contingency of such forecasts.

Meanwhile, RBS’s operational performance last year might be summed up as two steps forward, one step back. A year ago Mr McEwan unveiled a sweeping restructuring programme, including consolidating seven divisions into three. Of these, two – Personal and Business Banking and Commercial and Private Banking – performed decently last year, with returns on equity (ROE) of 17.5 per cent and 11.9 per cent, respectively. The UK mortgage business in particular is thriving. But the third division, Corporate and Institutional Banking – effectively the investment bank – made an “unacceptable” negative 4.2 per cent ROE.

That explains Mr McEwan’s decision to massively scale it back – well beyond the restructuring measures announced last year. He wants to shrink radically the investment bank’s geographic footprint from 38 to about 13 countries. Risk-weighted assets will be reduced by three-fifths from £107bn to £35-40bn in 2019. The bosses warned of "significant" job losses among the division’s 16,000-18,000 staff.

The question is whether profits within the bank’s UK and Irish arms will make up for another half-decade of upheaval in the investment bank. Progress on reducing costs is promising. Management hacked £1.1bn out of the cost structure last year, and hopes to cut another £800m this year. That was one major reason why RBS was able to post a ‘headline’ operating profit of £3.5bn last year, up from a loss of £7.5bn in 2013, despite a 6 per cent fall in income.

The other reason was a dramatic shift from write-downs to write-backs. It released impairments of £1.2bn last year, having booked £8.4bn worth in 2013. Rising property values in a positive economic climate eased the distress of assets within RBS Capital Resolution (the ‘bad bank’) and Ulster Bank, the group’s Irish lender. But management warned that these write-backs would not be repeated this year. Restructuring costs, which like misconduct costs are factored into the headline profit figure, will also be higher.

The £2.6bn profit reported in our table reflects headline profit minus adjustments for goodwill and various other charges. Significantly, however, it does not include a £4bn fair-value write-down on Citizens Financial, the US bank RBS floated at a somewhat disappointing price in New York last year, and a £1.9bn tax charge. The group consequently posted net losses of £3.5bn.