Shares in Royal Bank of Scotland (LSE: RBS) have fallen 8% today after the troubled bank announced its largest pre-tax loss since the crisis in 2008 a truly massive £8.2bn. That's up from £5.2bn in 2012.
This loss is larger than expected, and shows that RBS is a long way from sorting all out its problems. Privatisation looks to be a long way off.
The bank is also attracting a lot of bad press for paying £576m in staff bonuses. Any criticism that RBS gets on this issue is probably deserved.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But I'm not going to dwell on bonuses today. I want to look at whether it's worth buying RBS after this latest piece of bad news. At the current price of 326p, the shares are 6% lower than a year ago, and some bargain hunters may be tempted to dive in.
However and sorry if I got anyone excited there briefly I won't be joining them.
The new boss, Ross McEwan, is following the right strategy. He's cutting costs, shrinking the balance sheet, and refocusing the business on the UK.
Once more costs have been cut, McEwan hopes that the cost/income ratio will fall from the current 73% to 55% in 2017. He's also aiming to boost returns on equityacross the business.
All very sensible. But there's significant execution risk here in other words, there's no guarantee it will work out.
Yes, if RBS hits all its new targets on schedule, new investors may make a profit. But given its record, there's no guarantee that RBS will have a smooth recovery. There are plenty of potential problems that could trip McEwan up.
First, the latest restructuring plan announced today may cost more than expected. (The current cost estimate for the plan is £4bn as it is.)
Secondly, RBS may not get the price it's hoping for when it sells its main US subsidiary, Citizens. The sale price may also disappoint when RBS sells some of its UK branch network under the Williams & Glyn's banner.
Thirdly, there's the prospect of Scottish independence. As FT Alphaville pointed out this morning, if Scotland did become independent, RBS's credit ratings could easily be affected.
Most importantly of all, there's the risk of some fresh, unexpected disaster. Who knows what nasties may still be hidden away in the depths of the RBS loan book? Or could we see another mis-selling scandal similar to PPI?
You can't rule out further big losses which prove to be larger than analysts expected.
For me, there's much too much to worry about. I'm happy to sit this one out.
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
-
Review: Three magnificent Beachcomber resorts in MauritiusMoneyWeek Travel Ruth Emery explores the Indian Ocean island from Beachcomber resorts Shandrani, Trou aux Biches and Paradis
-
Banks pass stress testFeatures Britain’s seven biggest lenders have passed the second round of annual stress tests – but how resilient are the tests?
-
Should you buy RBS shares?Features The government is quietly selling its stake in RBS, the bank it bailed out at a cost of £45bn. Here, Matthew Partridge looks at whether the shares are worth buying.
-
RBS starts its return to the private sectorNews The government began to return Royal Bank of Scotland to the private sector this week, seven years after saving it from collapse.
-
Legal troubles haunt banksNews HSBC has put money aside for legal expenses, while US prosecutors have reopened investigations into Standard Chartered.
-
What's wrong with Britain's banks?Cover Story British banks are still in the post-crisis recovery position. Look at what they do, not what they say, to see which ones are progressing, says James Ferguson.
