This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

Royal Bank of Scotland – more losses and downsizing

Royal Bank of Scotland (RBS) announced yet another set of disappointing results yesterday (27/2/2014). The share price closed down 8% on the day and is now way below what the Government paid for its majority stake in the business. New chief executive Ross McEwan announced the results after the previous one, Stephen Hester, had departed to sort out another basket case – RSA (formerly Royal and  Sun Alliance). It was certainly an opportune moment to move on.

Last year RBS managed to lose £8.2 billion which is the six consecutive year of losses after the debacle in 2008. With the Government (i.e. you and me) owning over 80% of the company, that means a loss of £50 for every man, woman and child in the country last year alone – not a trivial figure. For the few private shareholders who remain as holders of the stock, the outlook continues to look bleak. The bank is clearly shrinking as losses force it to dispose of valuable assets so as to keep its capital ratios at an adequate level.

It is obvious from reading the detail of the results announcement that RBS simply got too big and complex. For example they now need to move from “50 core banking systems to around 10” and “from 80 payment systems….to approximately 10“, i.e. major simplifications of the business are required to reduce costs. This restructuring will cost £5 billion over 2014 to 2017 so there are still more costs to come. As the CEO says in the announcement: “RBS remains a complex bank. We can be hard to do business with, costly to operate, and complicated to work in.” He makes it appear that he does not like what he sees having now taken charge of this business. One would surely have expected the internal system problems to have been tackeled more vigorously while Mr Hester was at the helm – six years is surely an adequate time to re-engineer the business, even if they were fire-fighting for the first year or two.

But as this writer has said before (in March 2012) “the financial reports of banks and their profits or losses still seem to be at the whim of bankers” so it is possible the new CEO just wants to “take a bath” where you get all the bad stuff out of the way at the start of ones reign. But I would not particularly bet on it, and most analysts seem to be forecasting losses for several more years.

Law suit status

An update for those investors who believed what Fred Goodwin said in the rights prospectus in 2008. There are four groups of lawyers involved now representing different groups of shareholders – Bird & Bird, Stewarts Law, Leon Kaye, and Quinn Emanuel Urquhart & Sullivan. Smaller shareholders are mainly represented by Bird & Bird and Leon Kaye although the latter has yet to file a claim. Indeed Bird & Bird have suggested to the Court that Leon Kaye and Quinn Emanuel should be excluded unless they file a claim soon. There is no love among lawyers as usual, because there are significant financial stakes at issue.

Mr Justice Hildyard, who is hearing the case, has queried the size of the claims and asked for “a greater degree of case and accuracy in future“. The size of the respective claims is of course important in any subsequent allocation of costs. Bird & Bird originally gave their clients losses as £900m but have now downsized them to £392m based on actual claimants.

And what will the likely legal costs be? Bird & Bird have estimated £10m to £12m for their costs alone. Herbert Smith Freehills, who are defending against all the claims for RBS, have submitted an estimate of £42m. As you can see, this will potentially be one of the biggest commercial legal bunfights in UK history which explains why so many legal vultures are circling. But as with any legal case, the outcome may be uncertain.

Roger Lawson

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