Stephen Hester has sent the strongest signal yet that
Royal Bank of Scotland could be ready for reprivatisation next year as the state-owned bank announced that a series of scandals had helped push it into losses of more than £5bn for 2012.
“The time when it can be privatised … is coming much closer,” the RBS chief executive said on Thursday.
The bank warned that it faced further fines for its role in the Libor rate-rigging affair and that it was struggling to dispose of the more than 300 branches it is required to offload under EU state-aid rules. It said it had informed Brussels it would probably need an extension to an end-of-year deadline to sell the branches.
The bank, which is 82 per cent taxpayer-owned following its £45bn bailout during the financial crisis, said it was moving closer to reprivatisation and the resumption of dividends to shareholders after four years of aggressive pruning of its activities. It also confirmed it was planning a partial flotation of Citizens, its US bank.
“Our target is for 2013 to be the last big year of restructuring,” Mr Hester said, admitting that 2012 had been a “chastening” year.
He would not be drawn on whether he had a preference over which form a privatisation should take, but said anything that returned value to taxpayers was good. However, chairman Sir Philip Hampton expressed little enthusiasm for distributing shares to the public due to the practical reasons of communicating with so many potential shareholders.
The 2012 loss, which compared with a loss of £1.19bn in 2011, reflected a fresh £450m provision to compensate customers mis-sold payment protection insurance. RBS has now set aside £2.2bn to resolve its share of the industry-wide scandal.
It had also set aside an extra £650m at the end of the year to cover the cost of compensating small and medium-sized businesses mis-sold interest rate hedging products, bringing its total provision for the matter to £700m.
The group’s £381m settlement with US and UK regulators over the Libor scandal was another headwind. “The group continues to co-operate with other bodies in this regard and expects it will incur some additional financial penalties,” it said.
Those still looking at the matter included the European Commission and Japanese authorities, it added.
The biggest factor in RBS’s full-year loss was an artificial £4.65bn “own credit” loss linked to the fluctuating value of its own debt and derivative liabilities.
At an operating level – which excludes the mis-selling and the “own credit” charges, as well as other items – the bank posted a profit of £3.46bn, up from £1.82bn in 2011.
RBS has to sell a chunk of its UK retail business as a condition of the European Commission’s endorsement of its rescue by the UK government. A planned sale to Spain’s Santander, initially valued at £1.65bn, fell apart in October.
Mr Hester said: “There aren’t a lot of buyers for UK banks right now. I think that will change over time.”
RBS said turning the branches into a standalone business, with a float under the Williams & Glyn’s brand, was the most likely option. It also raised the possibility of an investor taking a stake in the business before an IPO.
Mr Hester said he was hopeful the group could put its legacy of past misconduct behind it this year. The date of its reprivatisation was entirely up to the government, he added.
“The clean-up of the company should be much more evident as we go through into 2014,” he said.
More job losses were likely amid a further shrinking of RBS’s investment banking activities, he added.
Mr Hester suggested that about a quarter of Citizens could be sold, adding that an IPO could be a useful source of capital for the British group.
The subsidiary employs 14,700 and serves 5m customers in the northeast of the US. RBS is aiming to float the business in the US in about two years’ time.
George Osborne, chancellor, said he wanted RBS to be “focused on serving British businesses and consumers, with a smaller international investment bank to support that activity rather than to rival it”.
He added: “I welcome RBS’s announcement today to accelerate that strategy.”
Shares in the group closed down 6.6 per cent at 323.9p.
Bank faces pension funding deficit
Yet another legacy issue has come back to haunt Royal Bank of Scotland, in the form of its pension fund. Just at the moment when RBS is under pressure from regulators to boost its capital, the funding deficit at the UK bank’s £30bn defined benefit pension scheme has ballooned, writes Patrick Jenkins.
Bruce van Saun, the lender’s finance director, is now faced with the prospect of having to inject yet more top-up funding, following a triennial review by actuaries due in March
. With the funding deficit having jumped from £2bn to £3.7bn over the past year, experts estimate that could mean nearly £200m more a year needs to be injected into the fund – a figure that comes straight out of the bank’s precious core capital. That is on top of a current annual injection of £650m.
RBS is not alone. Any big pension fund will find its liabilities jumping in the current low interest rate environment, as future projected “discount rates” – the income that assets are projected to generate for prospective pensioners – move lower. However, the gap at RBS and the size of the scheme are unusually large.
“The underlying pension liabilities are almost 150 per cent of RBS’s market capitalisation of £21bn, so the scheme is very large in relation to the company,” said John Ralfe, an independent pension consultant. “Within the FTSE 100 it is in the top five for liabilities to market cap.”