RBS has made much progress over the years, contracting its Non-Core bank assets, improving capital and loan to deposit ratios
The latest set of results are encouraging although the bank still reported a large loss and while RBS would have us believe it’s mostly due to a ₤4.6bn accounting charge for a big improvement in its own credit spreads (which is positive), if you look at Table 1, you’ll see RBS still incurred impairment losses of ₤5.3bn.
FY12 key points to note include:
- Core bank operating profit of ₤6.34bn (₤6.05bn FY11)
- Funded assets were down ₤107bn in 2012 to ₤870bn, driven by Non-Core and Markets
- Risk weighted assets decreased by ₤48bn to ₤460bn, down ₤21bn in 4Q12
- Non-Core assets down to ₤57bn
- Core Tier 1 ratio of 10.3% (9.7% FY11)
- Loan book now 100% funded by customer deposits
- Short term wholesale funding down a further £60bn in 2012 to ₤42bn, covered 3.5 times by the Group’s high quality liquid asset portfolio
RBS passed a number of significant milestones in 2012:
- Resumption of coupon payments on hybrid capital instruments
- Exit from the UK Government Asset Protection Scheme with no claims made
- Repayment in full of remaining Special Liquidity Scheme and Credit Guarantee Scheme funding
- Successful flotation of Direct Line Group
- Relaunch of the sale process for 315 branches required to be sold under the EC State Aid agreement
- Over ₤200bn of Non-Core funded assets taken off the balance sheet since 2008
Impairment losses have contracted over the last four years from ₤13.9bn FY09 (see Table 2) but again if you look at the table, impaired loans to total loans as a percentage increased even though gross loans continue to decline. This isn’t a good sign, it signals ongoing problems with the loan book. In fact of the total impaired loans for FY12, ₤3.06bn were from the core bank.
Recovery is a long, slow process. The problem is that the UK government are under pressure (both financial and political) to divest its 82% shareholding.
There’s been increasing speculation in the UK press that RBS will be fully nationalised. I think this is a logical step. Just last week the Governor of the Bank of England, Mervyn King, told the Banking Standards Commission that the Government should sell its stake in RBS
“The whole idea of a bank being 82 per cent-owned by the taxpayer, run at arms’ length from the Government, is a nonsense...It cannot make any sense. I think it would be much better to accept that it should have been a temporary period of ownership only, to restructure the bank and put it back.”
If the bank is nationalised it can share losses between the subordinated debt, hybrid and equity holders. While junior debt holders and equity holders would most likely take a complete loss of capital, those investors make up a much smaller number than voting, aggrieved Brits. RBS can then formally split the bank and float the good or Core bank and recoup some of its ₤45.5bn investment.
In conclusion I’d be a seller of anything below senior debt. However I’d be a happy holder of senior debt, as it still ranks the same as deposits and when Allied Irish was fully nationalised, senior debt holders were repaid in full and on time.
