Page last updated at 12:46 GMT, Thursday, 25 February 2010

RBS results: Good news for taxpayers?

By Edwin Lane
Business reporter, BBC News

RBS sign
RBS has reported a loss for the second year in a row

With a massive 84% stake in Royal Bank of Scotland, UK taxpayers have a lot riding on the performance of the bank.

So as its biggest shareholders, how concerned should we be about RBS's £3.6bn annual loss?

Put in context, the results do not look that bad - losses are lower than the £5bn predicted by many City analysts.

The bank's results are also moving in the right direction. This time last year, RBS reported a massive £24bn annual loss - the biggest loss in British corporate history.

That has led to cautious optimism among the investment firms that own the other 16% of RBS shares.

'Ahead of schedule'

Standard Life Investments is one of them. Its investment director, Euan Stirling, says that behind the loss, the good news is that RBS is making positive steps towards "successful rehabilitation" after the excesses of the Fred Goodwin era.

"RBS's management is taking steps to repair the balance sheet, reducing reliance on wholesale funding - and that's helping their margins," he said.

"They appear to be ahead of schedule in their restructuring plan."

But while RBS is making a loss, the rest of the UK's banking industry is seeing a return to bumper profits.

Last week Barclays, which avoided direct government support in the wake of the financial crisis, reported profits of £11.6bn, and the market-leading investment bank Goldman Sachs reported profits of around £8.7bn earlier this year.

So how can RBS be doing so badly when the rest of the industry seems to be doing so well?

The first answer is that RBS is still dealing with the fall-out from the financial crisis. Loans turning bad cost the bank a total of £13.8bn in write-downs last year.

"The people who left us last year I believe would have increased our profits by about a billion pounds"
Stephen Hester, RBS chief executive

RBS's chief executive Stephen Hester pointed out that RBS was recovering from "an inheritance that will take some time to clear".

RBS adds that losses from bad loans will probably decrease from now on.

"The issue of bad debt is already becoming yesterday's story," added Standard Life Investments' Euan Stirling. "The fact that it isn't going to get any worse is a real positive."

Bonus benefit

Bad loans aside, the bank would have made a profit of £8.3bn for 2009. The investment banking arm of the bank accounted for most of that profit - around £5.7bn.

That leads to the second explanation for RBS's current problems - the weakness of its retail banking business.

While all banks are making losses on bad loans, other banks are able to offset the losses through gains in High Street banking. Customers are simply choosing rival banks over RBS because of its perceived weakness.

In this context, RBS's decision to pay its profit-making investment bankers £1.3bn in bonuses is good news for taxpayers who care about shareholder value, analysts maintain.

Awarding bonuses at a part-nationalised bank is hardly going to be popular with the public, but failing to pay them would have seen large-scale defections of star investment bankers to rival firms - something that City headhunters say is already happening.

Stephen Hester
RBS chief Stephen Hester has defended bankers' bonuses

The inability to pay even bigger bonuses has already affected profits, Mr Hester told the BBC, with dozens of star performers moving to better-paid jobs and taking their profit-making abilities with them.

"The people who left us last year I believe would have increased our profits by about a billion pounds," he said.

However, critics counter that the suspiciously round figure of £1bn is unverifiable and that Mr Hester's argument is self-serving.

After all, despite the improvements at RBS since the depths of the financial crisis more than a year ago, it will still take several years before taxpayers get back the £45bn paid for the 84% stake last year.

UK Financial Investments (UKFI), the body set up to manage the government's stakes in the banking sector, has no specific conditions that need to be met before it can begin selling back its stake in RBS and others to the stock markets.

Although it is now more likely that UKFI can sell the RBS stake back at a profit, it is expected to take years before that process is complete.

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