“With a seventh consecutive year of losses and post-bailout, 80% ownership by the British government, The Royal Bank of Scotland is clearly a Too-Big-To-Fail Bank.”, Mike Perry, former Chairman and CEO, IndyMac Bank
With 7th Straight Loss, R.B.S. Announces a Major Downsizing
A Royal Bank of Scotland ATM in London. Restructuring’s expected to cause significant job losses, including in the United States. Credit Stefan Wermuth/Reuters
LONDON — The Royal Bank of Scotland on Thursday reported its seventh consecutive annual loss and announced that it would dismantle its global investment bank as the company looks to shrink.
R.B.S., which is still controlled by the British government after a bailout, said it would reduce its geographic footprint to about 13 countries from 38, resulting in significant job losses, including in the United States. Risk-weighted assets are to be reduced by two-thirds, from 107 billion pounds, about $166 billion, to a range of £35 billion to £40 billion in 2019.
“This is a plan for a smaller, more focused, but ultimately more valuable bank, with the vast majority of its assets in the U.K. — and for R.B.S. marks the end of the stand-alone global investment bank model,” said Ross McEwan, the bank’s chief executive.
R.B.S., which is based in Edinburgh and is about 80 percent owned by the British government after a rescue during the financial crisis, reported a loss of £3.5 billion for 2014, a decrease from the £9 billion loss in the previous year.
The loss was largely the result of a £4 billion write-down related to the value of its partly owned Citizens Financial Group unit in the United States. R.B.S. also had £2.2 billion in regulatory and litigation charges and £1.3 billion in restructuring costs.
The bank’s shares closed down 4.14 percent to 387 pence on the news. A price of about 455 pence is needed for the government to break even on its bailout investment.
Analysts had mixed reactions to the results. Citigroup analysts said that the balance sheet improvement and revised strategy were likely to be well received, but that “significant execution risks exist, which are likely to weigh on 2015 earnings.” They recommended that investors sell. Joseph Dickerson at Jefferies, who titled his client note “Did That Hurt? 50 Shades of Profitability,” suggested that investors should buy.
The bank reported an operating profit of £3.5 billion for the year, in contrast to a loss of £7.5 billion in 2013.
“These results make clear that underneath the conduct, litigation and restructuring charges, we have strong-performing customer businesses that are geared towards delivering sustainable returns for investors,” Mr. McEwan said.
The bank reduced costs by £1.1 billion in 2014, and its core Tier 1 capital ratio — a measure of its ability to weather financial disturbances — rose to 11.2 percent from 10.8 percent at the end of September.
R.B.S. confirmed the appointment of Howard Davies, the former head of the Financial Services Authority, the predecessor to the Financial Conduct Authority, to become its next chairman. He succeeds Philip Hampton, who is departing. The appointment caused some concern about Britain’s own revolving door between banking and regulation, and revived a debate about the failures of the Financial Services Authority under Mr. Davies to detect any of the warning signs leading up to the financial crisis.
Mr. McEwan said he would forfeit a so-called allowance — an odd construct of European banking that allows bankers to get around bonus limits — of £1 million, bringing his total pay for 2015 to more than £2.7 million. R.B.S.’s bonus pool shrank 16 percent, to £483 million, from 2013.
In a letter to Mr. Hampton, George Osborne, the chancellor of the Exchequer, said that it was right to reduce the bonus pool.
“In the context of R.B.S.’s conduct fines in 2014, it is right that the bonus pool is down again,” Mr. Osborne said. “I would also expect that, as in the past, no executive directors or members of the executive committee will receive bonuses, despite improved profitability.”
R.B.S. also announced the sale of a $36.5 billion portfolio of American and Canadian loans to Mizuho Bank for about $3 billion. The bank will lose about $200 million on the sale.
While the bank’s 2014 performance was better than 2013’s, it continues to be hobbled by legal costs. American and British regulators fined R.B.S. and five other banks a combined £2.6 billion last year for foreign exchange market manipulation. And a number of regulatory issues remain.
“It has taken far longer than anyone realized to root out all the past problems, practices and related fines, and we still have challenges on the horizon,” Mr. McEwan said in a letter accompanying the year-end results. “We are changing the culture of this bank; our aim is that shareholders are not exposed to this scale of conduct risk again.”
He noted that the bank was significantly more focused on Britain than it was at the time of the financial crisis. Eighty percent of revenue is now generated in Britain, compared with 48 percent in 2008.
Correction: February 26, 2015
An earlier version of this article misstated the date that American and British regulators fined the Royal Bank of Scotland and five other banks a combined £2.6 billion. It was last year, not last month.
A version of this article appears in print on February 27, 2015, on page B7 of the New York edition with the headline: With 7th Straight Loss, R.B.S. Announces a Major Downsizing.