Royal Bank of Scotland Group plc (LON:RBS) has reported a wider-than-expected annual loss today, reflecting litigation and restructuring costs.
The Scottish lender posted an attributed loss of £6.95bn for the year to 31 December 2016, compared to a loss of £1.97bn in the year-ago period, marking its ninth consecutive loss. Analysts had been expecting a £6.1bn loss.
RBS blamed the wider losses on litigation and conduct costs of £5.86bn, restructuring costs of £2.10bn and capital resolution disposal losses and impairments of £825mln.
A payment of £1.19bn to the Treasury last year to settle a condition of its 2008 bailout and clear the path for restarting dividend repayments in future also pushed RBS deeper into the red.
The 72% state-owned bank, however, said it believes it will be profitable in 2018 on the back of targeted cost savings of £750mln this year.
The FTSE 100 listed group is pursuing a cost-income ratio of below 50% and a return on tangible equity of at least 12% by 2020. The adjusted cost income ratio for 2016 was 66% compared with 72% a year earlier while the adjusted return on tangible equity fell to 11.1% from 11.2%.
Meanwhile, a return to profit will be subject to clearing remaining legacy issues, including the bank’s US litigation over the way it packaged and sold mortgage backed securities (RMBS). RBS has taken a further £3.1bn provision in its results to cover an expected US fine.
Chairman Howard Davies said the bank remains under investigation. "At this point we can’t say when this issue wil be resolved and we won't be providing any update on this today," he said.
As a result of charges related to legacy issues, the common equity tier 1 (CET1) ratio fell 210 basis points to 13.4% but RBS said it "remains ahead of our target". The bank is aiming for a CET1 ratio of at least 13% by the end of 2017.
The disappointing results come after RBS revealed plans to shelve its sale of the Williams & Glyn branches and instead set up a fund for challenger banks. RBS has taken a £750mln provision in its results for the proposal, which will be put forward to the European Commission.
Chief financial officer Ewen Stevenson said if the plan is approved the Treasury will need renegotiate the terms of its state aid agreement which could take at least until the fourth quarter of 2017. "If accepted, it would deliver an outcome more quickly with more certainty than if were to sell the branches," he said.
However, the plans face several stumbling blocks as it comes just weeks before the UK government is due start formal talks to leave the European Union.
The sale of the 300 branches was a condition of the bank’s £45.5bn state bailout during the financial crisis. RBS has spent seven years and more than £1.5bn in trying to spin-off the branches.
Analysts have suggested the move could pave the way for resumed dividend payments. Under previous proposals, RBS was only able to pay a dividend until an exit from Williams & Glyn was assured.
However, Shore Capital said today there remains plenty more work before dividend payments can recommence and the UK government can begin selling down its remaining 72% stake.
On the group's results, the broker said: "Most notably, management expects it to be another year in which the group incurs significant one-off charges, but anticipates the group will return to statutory profitability in 2018."
ShoreCap added that it believes the bank's target for a return on tangible equity is achievable but said "we hesitate to put too much store on such long-term targets given the bank’s (and industry’s) track record of disappointing on return targets".
Chief executive Ross McEwan also highlighted the risks that Brexit brings to the group, adding that it is preparing for headwinds.
While McEwan thinks consumer behaviour has remained broadly unchanged since the UK voted to leave the European Union, the formal exit from the bloc is still to happen and the full impact of the referendum is yet to be realised.
Brexit will have wide reaching consequences and we will have to review our strategy when the time comes, he said. "We believe our strategy will be able to withstand risks, we are building our capital strength and in 2017 we will continue to reduce legacy costs," McEwan said.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "RBS is still paying for the sins of the past, though the bank is now saying that 2017 is going to be its last year in purgatory, and that shareholders can look forward to a brighter, more profitable year in 2018.
"That may well be the case, there is a decent bank inside RBS struggling to get out, but it’s those 'one-off items' which pop up with such alarming regularity which keep pushing the bank deep into the red."
Shares fell 4.45% to 238.30p in afternoon trading.
-- Adds comments from CFO, CEO, Chairman and analysts, updates share price --