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Scots landing

30 Oct 2015 By George Hay

Royal Bank of Scotland’s new-found solvency strength is not quite what it seems. Following the disposal of its stake in U.S. arm Citizens, the UK bank revealed on Oct. 30 it would sport a 16 percent core Tier 1 ratio – four times what it was in early 2008. But Chief Executive Ross McEwan can’t yet afford to celebrate.

RBS currently has 40.2 billion pounds of core Tier 1 capital, according to results for the three months to the end of September. Following the Citizens disposal, risk-weighted assets should fall by 23 percent to 244 billion pounds. But the numerator in its capital calculation is in line for a battering.

The most obvious threat is conduct costs related to the alleged mis-selling of mortgage-backed securities. In a worst-case scenario these could be as much as $13 billion (8.5 billion pounds). Factor in 2.7 billion pounds in restructuring costs that still need to be taken through the profit and loss statement, plus 1.2 billion pounds in costs relating to RBS’s 2008 bailout, and its core Tier 1 ratio looks more like 11.4 percent.

RBS has 2.4 billion pounds of litigation provisions. But it may also face other conduct charges, such as potential fines for an overly robust approach to dealing with small UK businesses in distress. More encouragingly, the bank is generating capital itself – its core Tier 1 capital ratio rose by 0.4 percentage points in the third quarter alone. If RBS can keep this up, it would be at its targeted 13 percent core Tier 1 ratio by the end of next year.

It won’t be easy. The release of impairment provisions from the bank’s extra conservative approach last year has slowed, and group pre-tax profit missed consensus. Non-interest income declined by a third in the quarter year-on-year, and net interest margins are under pressure.

Unlike the almost re-privatised Lloyds Banking Group, RBS is still almost three-quarters owned by the state. On less extreme conduct fine projections, RBS’s capital looks comfortable enough. But while banker-bashing has receded under the Conservative government, investors hoping for a dividend still need a telescope.


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