Brexit fallout looms large over Royal Bank of Scotland as losses, costs mount

Royal Bank of Scotland on Friday reported wider first-half losses, 1.3 billion pounds of new litigation charges and axed plans to turn its Williams & Glyn unit into a stand-alone bank, as it braces for post-Brexit shocks to the UK economy.

RBS, which has not made an annual profit since 2007, booked 2.05 billion pounds ($2.69 billion) of losses for the first half of 2016, up from a 179 million pounds loss in the first half last year.

Chief Executive Ross McEwan is battling to complete a vast restructuring of the taxpayer-backed bank, which includes a raft of asset sales, job cuts and multi-billion dollar charges to settle litigation and pay regulatory fines for past misconduct.

 

Those issues have complicated RBS's task of finding profitable business in a low interest rate economy with feeble credit demand, which now faces pressures from Britain's vote to leave the European Union and a possible new referendum on Scottish independence.

"There is more work to be done but we are making progress," McEwan said.

He said RBS had not yet decided whether to pass on the Bank of England's 25 basis point base rate cut to standard variable rate borrowers, a key part of the central bank's plans unveiled on Thursday to cushion the economy against Brexit.

McEwan said RBS would look at the BoE's new Term Funding Scheme aimed at helping banks to boost lending to households and businesses.

RBS shares, which have fallen almost 40 per cent so far this year, were 5 per cent lower by 0944 GMT.

RBS said it no longer planned to build an independent technology platform for its Williams & Glyn business, citing complexity and the lower interest rate environment.

The bank had originally wanted to turn the small business lender into a 'bank within a bank' so it could achieve a clean break when the business was sold under the terms of its 45.5 billion-pound state bailout in the global financial crisis.

But RBS said the risks and costs inherent in its plan were no longer "prudent" and it would look at other ways to achieve the carve out, which has already cost it 1.5 billion pounds.

Spain's Banco Santander has made a formal offer to take over Royal Bank of Scotland's Williams & Glyn business, two sources familiar with the matter said earlier this week.

RESTRUCTURING

Edinburgh-based RBS's total income fell by almost a fifth to 6.06 billion pounds in the first half, while the bigger losses were partly driven by a 630 million pound charge for corporate restructuring, some 345 million pounds of which related to Williams & Glyn.

"These results show how much work RBS still has on its plate, progress has been made, but it has been slow," Laith Khalaf, a senior analyst at Hargreaves Lansdown told Reuters.

"If you went back to the financial crisis very few people would have predicted that it would have taken so long to heal the wounds. Whilst RBS is relatively well capitalised, the issue is profitability rather than solvency," he said.

Impairments rose by more than a quarter to 409 million pounds and the bank warned a target to reduce its cost to income ratio below 55 per cent by 2019 would be "more challenging" in the environment.

RBS said restructuring costs were expected to remain high in 2016, totalling more than 1 billion pounds.

The bank also set aside an additional 450 million pounds to compensate customers mis-sold payment protection insurance and made a 180 million euros ($201 million) provision for redress in its Irish tracker mortgages business.

These came on top of 707 million pounds of new litigation charges, which analysts at Bernstein said were largely attributable to a long-running dispute with investors over its 2008 rights issue.

Despite the provision, McEwan told a conference call the bank had yet to make any agreement with claimants over the case, which he still expected to go to court in 2017.

Meanwhile, the bank continues to wait for what analysts broadly expect to be the biggest regulatory penalty in its history for its role in mis-selling U.S. mortgage bonds in the run up to the financial crisis.

"We continue to deal with a range of uncertainties in the external environment and ... substantial related incremental provisions may be recognised during remainder of year," RBS said.

(Reporting By Andrew MacAskill and Sinead Cruise, editing by Rachel Armstrong and Jane Merriman)