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RBS net loss widens to £9 billion

Bank outlines plans to return to profitability, seeks to reduce costs 55% in 4 years

Royal Bank of Scotland Group posted the biggest full-year loss since its bailout in 2008 as chief executive officer Ross McEwan outlined plans to return what he called the industry’s least-trusted lender to profit.

The net loss widened to about £9 billion ($15 billion) in 2013 from £6.1 billion in the year-earlier period as the lender logged more than £12 billion in charges for impairments, customer redress and legal costs. The pretax operating loss, at £8.2 billion, missed the £5.28 billion estimate of 11 analysts surveyed by Bloomberg.

McEwan is trying to revive earnings after £46 billion of losses in six years by shrinking the investment bank, combining units and eliminating jobs. More than five years after giving RBS the biggest bank bailout in history, the government still hasn’t been able to cut its 80 per cent stake. The bank is also under political fire for awarding £576 million of bonuses to staff, a debate McEwan today called “emotional.”

“The key challenge for them is how to return to profitability to allow themselves then to normalise their ownership structure,” said Edward Bonham Carter, CEO of Jupiter Fund Management, which oversees about £32 billion. “The issue for them through their reorganisation is how to reduce the size of the balance sheet, which they have started. They have to simplify their structure.” The stock fell 6.8 per cent to 330 pence as of 9:43am in London trading, below the 407-pence price at which the government says it would break even on its holding. RBS is down 4.8 per cent in the past year while Lloyds Banking Group, the second-biggest government-owned lender, is up 51 per cent.

McEwan on Thursday set a profitability target of a 12 per cent return on tangible equity. The lender will also seek to reduce costs to about 55 per cent of income over the next four years, down from 73 per cent on Thursday. It will also seek to bolster its core equity tier one capital ratio to about 12 per cent.

The lender will reduce risk-weighted assets in the international banking and securities unit by £50 billion, about a third, by 2020, lower costs by £5 billion over the next four years. “We are the least trusted company in the least trusted sector of the economy,” McEwan, 56, told reporters in London on Thursday. “That must change,” he said. “We need to be a smaller, simpler and smarter bank.”

To achieve those targets, RBS will combine seven units into three: personal and commercial banking, run by Les Matheson, commercial and private banking, headed by Alison Rose, and corporate and institutional banking, overseen by Donald Workman.

The personal business will aim to generate about half of RBS’s profit and produce a return on equity of about 15 per cent. The corporate unit will account for about a fifth of profit and produce a 10 per cent ROE, RBS said.

The Treasury has been pushing RBS to focus on UK consumer and corporate banking as it tries to recoup some of the £45.5 billion it spent bailing out the company. Former CEO Stephen Hester departed in June after the government pressed him to shrink the securities unit, and five months later, RBS set up an internal bad bank in an effort to speed up the cleaning up of its balance sheet.

The lender also sold a £1.11 billion stake in Direct Line Insurance Group on Wednesday. RBS had to divest its holding in the UK’s biggest home and car insurer to comply with European Union state aid rules after receiving its bailout.

“The reorganised bank will be a UK-focused retail and corporate bank with an international footprint to drive its corporate business,” RBS said.

The lender can’t say how many jobs will be cut until the three business heads develop their plans, McEwan told reporters. RBS will pay employees £576 million in bonuses for 2013, down from £679 million in the previous year. Staff at the markets unit will receive £237 million in variable compensation, compared with £287 million in 2012.