When Alison Rose presents her first set of results on Friday 14 February, the newly-appointed Royal Bank of Scotland (RBS) chief executive will have three things to be grateful for.
First, legacy conduct issues are receding. For the first time in a golden age, these results do not carry the threat of a major charge for payment protection insurance (PPI) redress, following the passing of last summer’s claims deadline. Though RBS was forced to cough up an additional £900m in its third quarter results, analysts no longer expect material charges.
Second, one substantial political danger has abated. As she wades through her considerable in-tray, Ms Rose is mercifully unbothered by the pen of an interventionist Prime Minister in the shape of Jeremy Corbyn, who planned to halt branch closures and even block steps towards re-privatisation. Although navigating RBS’s taxpayer ownership is likely to remain a protracted affair, December’s general election result will have at least assured the new boss of her autonomy.
Third, the Bank of England decided to leave interest rates unchanged at 0.75 per cent at its January meeting, providing some relief – however modest – to the considerable pressure already facing UK lenders’ net interest margins.
Against a challenging economic and operating backdrop for UK banking, Ms Rose will no doubt take any help she can get. But gratitude and good fortune do not amount to a strategy. Moreover, for RBS’s long-suffering shareholders, there are few reasons to assume that Valentine’s Day will mark the start of a new love affair.
A fresh start?
Despite the many obstacles facing RBS, Ms Rose will soon stamp her authority on the top job, after 28 years as witness to the empire-building of Fred 'the Shred' Goodwin, state nationalisation, and the subsequent multi-year restructuring conducted by Stephen Hester and Ross McEwan. After the ambition, failure, apologies and billions of pounds in fines, Ms Rose has the chance to write a new chapter.
On her first day in the job on 1 November, Ms Rose characterised RBS as a “very different bank” to the one inherited by her immediate predecessor; “one that is stronger, safer, and a real partner to our customers in all senses of the word”.
It’s hard to dispute that view. Over Mr McEwan’s tenure, the lender pruned billions in riskier assets, propped up its common equity tier one capital ratios, while settling its legacy conduct issues with American, British and Irish regulators. To the optimist, the resolution of the PPI scandal now gives Ms Rose and her team greater clarity over cash generation, and where to redeploy it. Fewer litigation and conduct charges also give RBS a chance to bring its cost-to-income ratio towards sustainable levels. Amid the UK’s lacklustre economic growth, reducing overheads still remains RBS's best chance of improving its return on equity.
The November speech also touched on Ms Rose’s aspirations to “build a bank that is purpose-led”, with a focus on customers’ financial capability, supporting enterprise and driving the UK’s transition to a low-carbon economy. This vision is laudable. But when she addresses the market next week, Ms Rose will need to explain where shareholders fit in. Her inaugural address may have been directed at colleagues, but mention of investors or the words ‘investment case’ were conspicuous by their absence.
Personnel change
Ms Rose also stated her aim to “invest in our culture – to create a truly inclusive environment”. But few RBS watchers believe the bank’s return on equity can improve without some exclusionary measures.
On that front, we have also been told to expect news on NatWest Markets, following a shake-up of its senior team in December. Various reports suggest the departures of chief executive Chris Marks and chief financial officer Richard Place, apparently at Ms Rose’s behest, could precede a cull within the division, as the new boss looks to take costs out of problem areas.
Indeed, as third-quarter results made plain, some divisions are holding back a turnaround. Both the commercial banking and Ulster Bank arms generate single-digit returns on equity. NatWest Markets, which accounts for just under a quarter of the bank’s funded and risk-weighted assets, generated income of just £0.2bn in the period, against operating expenses of £0.3bn. Hopefully, investors should soon have a clearer idea of what Ms Rose means when she talks of the division’s “continuing transformation and simplification”.
Investors will also be looking for details on the early reception of Bó, the digital bank RBS launched in November as a rival to popular online start-ups such as Monzo and Revolut. According to various news reports, Bó chief executive Mark Bailie is set to step down, immediately raising questions about the direction of one of RBS’s flagship digital investments. The drive to adapt is understandable, but a high-street bank was always going to struggle to pass itself off as hip.
An ESG push
While we think digitisation efforts will prove drawn-out and costly, a renewed focus on ethical financing seems to us a smarter push. Next week’s results have been prefaced by several announcements about the lending RBS wants to be known for, including a £1bn female entrepreneurship funding to help create at least 50,000 new businesses by 2023, and pledges to increase financing to renewable energy and the UK’s transition to a zero-carbon economy.
If purpose-led finance can also divert capital from the dogfight that is the UK mortgage market – and where RBS’s front-book margins have eroded – that can only be welcomed. But at present investors have been left to hope that these initiatives will incidentally lead to better returns (and possibly a higher ESG weighting from fund managers). More importantly, Ms Rose needs to show how her lending priorities will help to reverse the gradual slide in the net interest margin.
