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New RBS boss\u00a0Alison Rose has the unenviable task of boosting the taxpayer-backed bank’s share price to a level where the government might finally want to sell off its 62 per cent stake<\/p>\n<\/div>\n
PPI, or payment protection insurance, was one of the major weights on RBS’s numbers in the three months from July to September.\u00a0<\/p>\n
The mis-selling of PPI policies, which were designed to protect borrowers if they lost their job or fell ill and couldn’t pay their instalments, has become one of banking’s biggest scandals.<\/p>\n
In the third quarter of this year, RBS, which owns the Natwest brand, was forced to set aside another \u00a3900million to cover a last-minute rush of claims.<\/p>\n
This has taken its total bill to \u00a36.2billion, and pushed the bank to a third-quarter loss of \u00a38million.<\/p>\n
The PPI saga is largely over, and investors may be wondering whether now is the time to buy into the High Street lender.<\/p>\n
Unfortunately, it isn’t that simple. The massive PPI charge has overshadowed other problems that Rose will have to tackle \u2013 so much so that Ian Gordon, banking analyst at Investec, said Rose’s predecessor Ross McEwan had given her a ‘hospital pass’.<\/p>\n
‘Alison Rose takes over as chief executive on November 1 and must be wondering what has just hit her. The third-quarter results make grim reading,’ he said.<\/p>\n
One major dilemma, which reared its head with renewed force in last week’s results, is what to do with the loss-making investment banking division, Natwest Markets, which mainly offers foreign exchange and complicated interest rate hedging products to corporate customers.<\/p>\n
It posted a loss of \u00a3193million in the third quarter of the year, with total income falling by \u00a3419million to just \u00a3150million.<\/p>\n
Clearly this is not a performance which RBS will want to keep repeating, but as Gordon says: ‘There’s no simple answer.’\u00a0<\/p>\n
He points out that it is difficult simply to shut down the division if RBS wants to continue serving big corporate clients, as they want some of its functions the investment bank provides.\u00a0<\/p>\n
Shrinking the operation may not be the answer either, as this would generate one-off costs such as redundancy payments.<\/p>\n
John Cronin, an analyst at Goodbody, thinks raking a fine-tooth comb over the unit will be one of Rose’s first tasks.<\/p>\n
He said: ‘Looking at Natwest Markets, I’m not sure Alison will strike the same tone in terms of her commitment to that business as Ross [McEwan].<\/p>\n
‘Ross had previously explained it was central in terms of capturing and retaining customers for the corporate bank.\u00a0<\/p>\n
I think you could debate that point. Given how badly Natwest Markets has performed, I think it’s a business RBS would like to be rid of.’<\/p>\n
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He believes a decision will be made in the full-year results next February. ‘I think it will be a halfway house \u2013 I don’t think they’ll close it,’ Cronin added.<\/p>\n
Another problem \u2013 and not one that Rose can do much about, as it is in the hands of the Bank of England \u2013 is persistently low interest rates, which are putting pressure on revenues.\u00a0<\/p>\n
Banks tend to be more profitable when rates are high, so the current conditions are a severe strain.<\/p>\n
RBS can continue to rip out costs to improve its profitability, which seems to be its plan.<\/p>\n
And Cronin thinks that, though it’s a ‘political hot potato’, the lender may be forced to close more of its branches across the Natwest, RBS and Ulster Bank brands.<\/p>\n
It has 843 \u2013 though according to figures from Which?, it has closed 638 Natwest branches and 412 under the RBS name over the past five years.<\/p>\n
So are RBS shares worth buying? There’s a special dividend on the cards, as the bank is set to share out its surplus capital among investors.<\/p>\n
At the end of the first half of 2019, it handed out \u00a31.7billion through a 2p per share ordinary dividend and 12p special dividend.<\/p>\n
But Gordon, who has set his target price for the shares at 210p compared with the current level of 225p, reckons they don’t look particularly cheap.<\/p>\n
He believes Onesavings Bank \u2013 one of the less well-known financial stocks \u2013 offers the best prospects for investors.<\/p>\n
Though RBS is certainly past its darkest days, Rose has a lot to do to restore it to full health.<\/p>\n
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