Royal Bank of Scotland has posted its first annual profit in a decade, but admitted it is braced for a multibillion-pound hit from US regulators.
The bank, which is still 71%-owned by the government, made a profit of £752m in 2017, following a £7bn loss in 2016. Its chief executive, Ross McEwan, declared it a symbolic moment and an indication RBS had moved on. The bank, however, would still have been in the red if a long-anticipated fine from the US Department of Justice (DoJ) had arrived during the financial year.
“RBS was the largest bank in the world 10 years ago, with a balance sheet of £2.2tn, and it spectacularly fell from grace,” McEwan told BBC Radio 4’s Today programme. “We’ve been restructuring the bank, but it’s taken time and a lot of cost to come out of countries and businesses we didn’t want to be in.”
McEwan flagged an ongoing investigation by the DoJ in the US over the sale of financial products linked to risky mortgages, which is likely to dent any future profits.
“We have been heavily hit with the sins of the past, and still have one large litigation and contract issue with the US Department of Justice,” McEwan said.
The bank has yet to resume dividend payouts to shareholders and is expected to do so only once it has reached a settlement with the DoJ.
Royal Bank of Scotland has made its first annual profit in a decade. Does this mean it is in good financial health?
RBS chief executive Ross McEwan declared a £752m profit for 2017 a “symbolic moment” for the bank, bailed out by the taxpayer in 2008 and still 71%-owned by the government.
It was the first annual profit in a decade and followed a £7bn loss in 2016. However, shares fell after the results were published, partly because the profit missed City expectations. Investors are also concerned about the prospect of a potentially large fine on RBS by the US Department of Justice.
The DoJ is expected to impose a multibillion-dollar penalty on the bank over the over its sale of financial products linked to risky mortgages, which is likely to dent profits for 2018.
RBS has yet to resume dividend payouts to shareholders, and is unlikely to do so until it has settled with the DoJ. A return to dividend payments – and full private ownership – will be taken as a clearer sign of confidence in the financial health of the bank.
Shares in RBS closed down nearly 5% on Friday, as the potential fine weighed on investors’ minds.
The bank’s chairman, Sir Howard Davies, said it was “not the moment to declare a final victory. We still have costly legacy issues to resolve.” He added that uncertainty over Brexit was a challenge to the bank’s European business.
McEwan told reporters the repair job would only be fully complete when it had a “normally functioning bank that our customers our proud to operate with, our staff are proud to be part of, and shareholders who actually want us. It’s clear the government - quite rightly - doesn’t want to be the long-term shareholder.”
He said the swing back to profit was one of the signals the bank was returning to normality, but added a resolution with the DoJ and resumption of a dividend payment were also part of the story.
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said RBS’s return to profit in 2017 amounted to “a stay of execution rather than a pardon” because of the looming US fine.
“It’s been a tricky but momentous year for RBS, in which the bank has put to bed many of the legacy issues which have hampered performance since the financial crisis,” he said.
“Two very big shadows still loom over RBS. One is the impending fine from the US, which is going to take a big slice out of the bank’s 2018 profits. The other is the large taxpayer stake, which has to be sold off at some point.”
RBS became the latest bank to reveal it pays men a lot more than women, with female employees earning on average 37.2% less than their male colleagues.
“The gender pay gap is not where we want it to be,” McEwan said. “What it shows is that we need to have more females in senior roles.”
RBS is hoping to rebuild its reputation after a series of scandals, including the revelation that it deliberately mistreated thousands of struggling small business customers who came to it for financial assistance in the wake of the banking crisis.
Earlier this week an influential group of MPs said the bank’s treatment of small firms via its GRG division was disgraceful. The Treasury committee, chaired by Nicky Morgan, published a full unredacted report into the scandal after the City regulator published only a redacted version.
“Our progress over the last few years has given us a stronger platform to compete in a rapidly changing market,” McEwan said. “And with many of our legacy issues behind us, the investment case for this bank is much clearer and the prospect of returning any excess capital to shareholders is getting closer.”
