RBS falls to £7bn loss as bank faces a decade in the red

ROYAL Bank of Scotland has warned it will have to cut more jobs and branches before it makes its first profit since the financial crisis, after it slumped to a £7bn loss for 2016.

The bank, which is still 72pc owned by the taxpayer, fell to its ninth consecutive annual loss last year, taking its total losses since its £45.5bn rescue in 2008 to about £58bn.

In a further blow, chief executive Ross McEwan said the lender will remain in the red this year too – meaning it will have been loss-making for a decade – but that he aimed to return the bank to profit in 2018.

It came as Mr McEwan revealed he plans to cut £750m of costs this year as part of a new programme to save £2bn by the end of 2020. He conceded that would mean more job losses and branch closures, but did not give more details.

The £7bn net loss compared with a £2bn loss in 2015 and sent RBS shares tumbling 4.5pc to 238.2p. “The bottom line loss is very stark, as is clear to everybody,” admitted Sir Howard Davies, the chairman of the bank.

The lender was hit last year by £5.9bn of charges related to historic misconduct issues and potential legal costs, which Mr McEwan described as the “sins of the past”.

The charges included a £3.1bn provision in anticipation of the bank reaching a settlement with the US Department of Justice (DoJ) over allegations it mis-sold toxic residential mortgagebacked securities that contributed to the financial crisis. RBS potentially faces criminal and civil action.

It also set aside £400m to compensate small business owners that were customers of its controversial, now-defunct Global Restructuring Group between 2008 and 2013 and £601m for the payment protection insurance scandal.

Some £2.1bn of restructuring costs also dragged the bank into the red, with a figure that included a £750m provi- sion for a plan to boost competition in SME banking that will allow RBS to abandon a problematic disposal of its Williams & Glyn (W&G) business.

The European Commission demanded the sale of the 300-branch network as a condition of RBS’s 2008 state rescue, but it has been unable to find a buyer. The Government last week revealed an alternative plan, which, if approved by Brussels, would result in RBS setting up a fund to help rival challenger banks grow.

Including W&G, RBS has about 1,550 branches, but this will fall under the fresh cost-cutting drive under Mr McEwan, who took home a total of £3.5m last year. Overall bonuses for staff slid 8pc to £343m. The lender has already closed about 450 branches since the end of 2013. Its workforce has shrunk from 180,000 in 2008 to 80,000, largely through job cuts.

There had been recent speculation that Mr McEwan, who took the helm in October 2013, could resign. But the RBS chief said yesterday that it was “clearly my objective” to see through the latest round of cost cuts.

Returning to profit in 2018 is dependent on RBS reaching a settlement with the DoJ this year and the European Commission accepting the alternative to a W&G disposal. These two obstacles are also preventing the Government from selling down its stake and a return to the dividend list.

There are many reasons for the ferocity of the antiestablishment tornado currently sweeping the Western world. But the botched response to the financial crisis, and in particular the mass bailing out of so many large financial institutions, is one key reason. The intervention shocked the public: they had become reluctant converts to capitalism on the basis that profits as well as losses would be privatised. Voters were fine with some earning millions because they understood that anybody who didn’t deliver the goods could just as easily lose everything. The system was a game with relatively fair rules.

The bailouts changed such perceptions, with many now believing that the rules were rigged and controlled by self-serving elites. Small firms and individuals were going bust or being fired, and yet big banks such as Royal Bank of Scotland were being kept in business. It was a case of tails we win and heads you lose – or so many came to think. The bailouts were rewards for failure. This was not the kind of capitalism voters had signed up for.

In reality, of course, it was only the bondholders and depositors who were rescued: shareholders lost fortunes, as did employees with stock holdings; top executives were sacked. The better off lost far more in wealth and income than poorer groups from the crisis.

But the bailouts were nevertheless psychologically and culturally destructive, as free marketeers and libertarians warned at the time. Governments damaged the credibility of our not-so-free market system and helped spawn the current backlash.

The economists who advocated the bailouts made a terrible mistake in their cost-benefit analyses: they didn’t include massive, time-delayed negatives such as the resurgence of arguments for higher, punitive taxes and (in some countries but luckily not Britain) for protectionism. The fact that we are stuck with a 45p top rate of income tax and a harsh, illogical stamp duty system is a direct result of anti-wealth policies introduced to placate the populism unleashed by the crisis. The recession might have been ended more quickly by the bailouts, but the long-term hit to growth was substantially increased.

All of this is water under the bridge. The questions now are: first, why is RBS still losing money and, second, are we ready to deal with the next financial crisis, whenever that may be, without having to resort to yet more counterproductive bailouts?

RBS losses have reached a cumulative £60bn or thereabouts after nine consecutive years of losses. This is madness: Fred Goodwin made terrible errors but it should never have taken a decade to sort them. I don’t blame the current CEO, Ross McEwan, or Stephen Hester, his predecessor. The problem was the government’s overall strategy.

For a start, as Andrew Lilico of Europe Economics argues, rather than the state injecting £45.5bn into the bank under the faulty premise that its equity still had value, it would have been better to hand the firm to its bondholders in 2008-09. There is no way the bank would still be losing money today had this approach been taken.

The alternative would have been to copy the Americans. The UK missed a massive trick during the crisis: if it was going to bail out many of its banks, it should have set up a version of the Troubled Asset Relief Programme (Tarp), rather than end up with a dominant equity stake in a giant, fatally troubled conglomerate bank, and then being forced to unwind a dodgy balance sheet ever so gradually. The trick in such situations is to move fast, suck out all the dodgy assets from troubled institutions and hold them in a special fund, create a new, cleaner bank, and incentivise everybody to tackle all problems as speedily as possible. The purge needs to be as thorough as it is fast. This helps to ensure managers don’t spend years trying to run down or liquidate bad assets, balancing that against the need to keep the overall operation running, and generally wasting time and focus.

Tarp was flawed for other reasons: like all bailouts, it rightly infuriated the public, but its Big Bang approach had the merit of shutting down the problem fast. Tarp itself ended up making the taxpayer a small profit, at least officially.

So could it all happen again? Yes, sadly. The UK’s new bankruptcy code and resolution mechanism – with its living wills and bail-in structures – has yet to be fully tested and finalised. Sorting this out to ensure that the authorities can manage another crisis without having to resort to picking the taxpayers’ pocket again is of vital importance. Capitalism will only survive if the public can be convinced that there is no longer one rule for big banks and another for the rest of us.

‘The trick in such situations is to move fast, suck out all the dodgy assets’