RBS First Profit in Decade Clouded by Costs and Litigation

(Bloomberg) -- Royal Bank of Scotland Group Plc swung to its first full-year profit in a decade, but the delay in settling with the U.S. Department of Justice over a mortgage-securities probe and rising restructuring costs are casting a shadow on any celebrations. The shares fell.

Executives at the government-owned bank warned restructuring costs will be about 2.5 billion pounds ($3.5 billion) over the next two years, and that it may take further charges for litigation as discussions with the U.S. regulators remain beyond the company’s control. The restructuring costs are partially linked to the increased use of artificial intelligence and technology, as the lender aims to catch up with its competitors.

“The digitalization of banking is happening at a pace,” Chief Executive Officer Ross McEwan, said in a call with reporters on Friday. “We will be spending more money to make sure that we stay up with it and lead on it as well.”

In the last three years, the usage of the branch network for transactions went down about a third as clients switched to digital, he said. McEwan declined to comment on potential closure of branches and job reductions. The company shut 259 branches last December.

The lender said there is no update so far on the pending litigation with the U.S. authorities. RBS, which is still hampered by past misconduct charges and scandals, needs to reach an agreement before it can resume dividends to help sell the government’s majority stake. RBS set aside about 764 million pounds for litigation provisions in the fourth quarter of 2017. 

The shares fell 4.5 percent to 269.3 pence at 8:56 a.m. in London trading, the biggest fall in a year.

McEwan had hoped to settle with the U.S. authorities by the end of last year, aiming to turn the bank back to profitability in 2018. In December, the New Zealander said that while RBS is well-capitalized to handle the settlement, there was no certainty on where the case sits in the DOJ priority list.

“The number of legacy issues the bank faces has reduced,” McEwan said. “However, we have one major legacy issue that we have yet to resolve which is with the US Department of Justice. The timing of the resolution of this issue is not in our control.”

Other highlights from RBS’s full year results:

• Annual profit of 752 million pounds in 2017 compared to a loss of about 6.96 billion pounds a year earlier
• CET1 capital ratio is 15.9 percent from 13.4 percent in 2016
• Pretax profit of 2.24 billion pounds for 2017, compared to a loss of 4.08 billion in 2016
• 4Q PPI provision top-up of 175 million pounds, impairments charges of 234 million pounds

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