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RBS could close more branches as part of Williams & Glyn transfer, says CEO

RBS is closer to resolving its legacy issues but will need to keep its nose clean to record consistent profits and resume dividend payments, according to AJ Bell
RBS
RBS boss Ross McEwan has defended the bank's plans to close branches

Royal Bank of Scotland Group PLC (LON:RBS) chief executive Ross McEwan has said the bank could close further branches as a result of transferring small business customers from the Williams & Glyn unit to competitors.

About 120,000 small business customers are being transferred to rivals as part of a deal RBS made with the European Commission to boost competition in the sector following its £45.5bn government bailout in 2008.

The EU had told RBS to sell Williams & Glyn as a condition of the bailout.

But after struggling to sell the division, RBS and the Treasury agreed an alternative deal with the EU that will see the bank spend £833mln to pay business customers to move to smaller rivals and to fund those competitors' banking ambitions.

READ: RBS to close 162 branches as part of Williams & Glyn cull

In an interview with LBC Radio on Friday, McEwan suggested more branch closures could be on the cards.

“I don’t know at this point,” he said in response to a question on the possible size of the closures.

“We’ll have to wait until the end of the year to see what... footfall disappears when we move these customers out.”

RBS has faced criticism from unions, customers and politicians over the bank’s plans to close stores.

Earlier this week, McEwan appeared before Westminster's Scottish Affairs Committee to explain why the bank was closing 62 branches in the nation.

He has defended the move, saying it is in response to changing customer behaviour with more people opting to use online banking.

RBS agrees less-than-expected settlement with US DoJ 

RBS was also making headlines this week after agreeing in principle a US$4.9bn payment with the US Department of Justice (DoJ) to settle a probe into the sale of residential mortgage-backed securities (RMBS) ahead of the 2008 financial crisis.

The payment was much less than estimates published in the media ranging up to US$13bn and drew a line under an issue that has been hanging over the bank’s head for some time.

READ: Investors in RBS breathe sigh of relief as lender agrees smaller than expected settlement with the US DoJ

RBS boss plans to stay until bank returns to private ownership

The settlement is expected to bring the government closer towards selling down its stake in RBS of more than 70%.

McEwan told LBC Radio he wants to see the bank returned to private hands before stepping down, dismissing speculation that he could leave in the near future after resolving the misconduct issue.

“Job’s not done yet. I’ve got a plan through to 2020,” he said. 

RBS needs to 'keep nose clean' to record profits and resume dividend payments

Investors are hoping the settlement will pave the way for RBS to resume dividend payments.

“For dividends to start flowing again the bank still needs to prove it can start to record consistent profits,” said Russ Mould, investment director at AJ Bell.

“The Q1 2018 states pre-tax profit of £1.2bn was a good start and RBS will be hoping that the 2019 deadline for payment protection insurance (PPI) claims can help it remove another cost burden from its profits.

“But the bank still needs to keep its nose clean, manage its loan book effectively and hope that the global economy does not roll over, even if analysts have pencilled in forecast dividend payments of 5.4p a share for 2018 and 12.2p for 2019.”

Analysts weigh impact of US settlement on RBS 

RBS has already set aside US$3.5bn ahead of the DoJ settlement so the second quarter results will include a further US$1.4bn in litigation costs.

“That will take RBS’s total litigation, fines and conduct bill, including PPI claims, to £20.9 billion since 2011, a figure which compares to its current market capitalisation of £33 billion and equates to 174p per share, so the damage suffered by investors has been enormous,” Mould said.

Analysts at Citigroup expect the payment to the DoJ will reduce the lender’s common equity tier 1 (CET1) capital ratio and tangible net asset value (TNAV) by 50 basis points and 5p respectively.

“Adjusting for the combined impact of both the RMBS settlement and the pension deficit contribution of £2bn (announced on 17 April), the 1Q18 pro-forma CET1 ratio is 15.1% and fully diluted TNAV 274p,” the analysts said.

“This implies RBS still has c£4.3bn of excess capital above the 13% target, or 13% of the stock’s market.”

Barclays Capital updated its forecasts for 2018-2020 to add £3bn of directed buybacks.

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