- Operating losses before tax greater than expected
- Cost cutting plan in place
- Bonus payments necessary to retain talent
Royal Bank of Scotland (RBS) has launched a turnaround plan to regain the trust of customers and investors after posting its worst annual loss since its government bailout in 2008.
Chief Executive Ross McEwan announced a major shake-up to restore the bank's health following a year of fines, customer complaints and technology problems.
The 81% state-backed lender reported an operating loss before tax of £8.24bn for the year through December 2013, up from a loss of £5.27bn in 2012, missing analysts' estimates of £6.7bn.
The group was hit by £3.8bn of legacy litigation, conduct and regulatory costs and £4.8bn of impairments and other losses relating to the establishment of its so-called internal bad bank.
The internal bad bank, or RBS Capital Resolution (RCR), holds the bank's toxic assets and was created to tidy up the group's balance sheet.
Total income was down 10% to £19.7bn, reflecting a £1.16bn fall in revenues from the re-sized Markets . Markets' operating profit, excluding £18m of impairments related to the creation of RCR, was down 58% to £638m, reflecting a reduced balance sheet.
As part of his revival plan, McEwan wants to simplify the bank by reducing its divisions from seven to three and cutting back on investment banking and hundreds of committees.
The bank will focus on core areas of retail, commercial and corporate.
Cost cuts on the way
RBS also intends to slash costs by £5.3bn, or 40%, over the next three to four years. It will include £3.1bn from the sale of various units, including its US retail franchise, and the rest from cutting overheads.
The company last night announced plans to sell its remaining stake in Direct Line, which could net the taxpayer-owned bank more than £1bn.
The bank said it would offer 423.2m shares, which is about 28% of the insurance firm. RBS was ordered to sell Direct Line as a condition of its 2008 bailout.
In line with the rest of the industry - as more customers opt for internet banking - RBS also plans to cut back its branches, McEwan confirmed but did not specify an amount.
McEwan defends bonus pool
McEwan dismissed criticism over the decision to hand out £576m in bonuses, including £237m to investment bankers.
Trade union Unite said the bank's decision to pay out more than half a billion pounds represented an "astonishing betrayal" for taxpayers given the extent of its losses.
Chris Leslie, Labour's shadow chief secretary to the Treasury, said: "Taxpayers will be incredulous that such large bonuses continue to be paid out at a time when huge losses are being made."
However, McEwan said the bonus pool, which was 15% down on 2012's £679m, was necessary to retain talent to drive the lender's growth.
"If we don't pay them competitively they will not stay," he said in a conference call.
Ewan said a series of scandals, including fines for mis-selling interest rate hedging products and payment protection insurance (PPI), has led to the firm being the "least trusted bank in Britain".
"We have to restore that trust," he said. "But we need to make sure that we do not lose the skills and abilities from a team that has saved over 162,000 British jobs by successfully restructuring 700 companies during 2013."
In November the company was also hit by a report released by Lawrence Tomlinson, an adviser to Britain's Business Secretary Vince Cable, which alleges that RBS effectively pushed small businesses into bankruptcy on purpose for financial gain.
"That really struck the heart of the organisation," McEwan said, adding that the bank has launched a detailed review to put a rest to the claims.
RBS capital plans
The bank's core Tier 1 ratio fell to 8.6%, more than two percentage points lower than some of its peers.
McEwan said he would be targeting a 12% ratio by 2016, boosted by the reduction of bad assets and the flotation of the US Citizens business.
Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers, said McEwan offered "some glimmers of light" with a reasonable capital cushion, improving credit quality and a simplification of the group which should "benefit the bank in due course".
However, he warned: "Many of the bank's targets are some years away, and in the meantime the overall loss is greater than had been expected, even after RBS had taken some of the sting out of the news with its pre-release announcement in late January."
Shares plunged 7.99% to 325.70p at 12:53 on Thursday.