Today’s full-year results show a pause in the shrinkage in Royal Bank of Scotland’s (LSE: RBS) (NYSE: RBS.US) asset base, but there could be more to come.
The incredible shrinking bank
The trend is unmistakable. Since last decade’s financial crisis Royal Bank of Scotland has shed ‘assets’ at a furious pace as consecutive balance sheets attest:
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Net asset value (£m) |
94,631 |
76,851 |
76,053 |
70,448 |
59,215 |
60,192 |
Asset shrinkage might have taken a breather with 2014’s results, but RBS seems set on scaling back its investment bank so it can focus on lending to British households and businesses. The chief executive reckons that, despite all the asset wind-down activity already executed, the bank plans to fully exit its Markets businesses in Central and Eastern Europe, the Middle East and Africa, and substantially reduce its presence in Asia Pacific and the US. There are also plans to exit the firm’s cash management services businesses outside the UK and RoI.
These are big moves and, at the current rate of contraction, it won’t be long before the lumbering behemoth that was Royal Bank of Scotland, top-heavy with debt and unwieldy assets, will disappear forever in a cloud of smoke. A new, smaller RBS with ambitions no greater than wanting to be just a bank will emerge from the ashes, phoenix-like, but is it worth hitching a ride on its back?
Fewer assets means lower earnings
By shedding assets, RBS is giving up opportunities to earn an income from those assets, which means we are unlikely to see a return to the big bucks earned in the past. However, that’s very much the point, because as well as giving the bank potential to earn big bucks, such inflated and unwieldy assets had huge propensity to deliver losses, too.
Today’s results show operating profit from continuing operations of £2.64 billion, which compares to a £8.45 billion operating loss during 2013. On those figures, it looks like RBS’s strategy to dispose of lacklustre assets and operations is starting to bear fruit. However, a return to profitability from massive losses is one thing, creating ongoing growth in earnings from here is quite another, especially when focusing on a smaller line of business.
Dark pools of unknowns
The chief executive says the days when global domination mattered more to RBS than great customer service are well and truly over. He reckons 80% of the firm’s revenues now come from the UK, which compares to 48% at the time of the 2008 financial crisis. It’s reassuring to know, then, that litigation and conduct costs only came to £2.19 billion during 2014 compared to £3.84 billion in 2013!
A lot remains to be done if RBS is to clean up its act fully and, rather ominously, the firm’s outlook statement says such conduct and litigation issues remain on going. RBS can’t predict when these issues will be resolved and it is possible that the costs relating to settling them could be substantial in 2015.
As I read through RBS’s full-year report, I get a real sense that the directors just don’t know what they’ll discover lurking in the roots and branches of the institution next, but they are battle-hardened and won’t be surprised any more whatever emerges from some dark, damp, smelly, mouldy corner.
Some say investing in banks is brave. I think it’s just unnecessary given the abundance of other great opportunities on the London market. Perhaps it’s better to invest in a ‘real’ business with a real trading advantage, rather than a facilitator of other business’s finance needs, with no differential advantage, as we see in the banks like Royal Bank of Scotland.