Legal costs at the state-backed bank will get worse before they get better, Barclays analysts predict
4:52PM BST 07 Jul 2015
Royal Bank of Scotland is set for an £8bn hit this year as restructuring and legal costs mount, analysts at Barclays predict.
Such high costs come at a difficult time for Chancellor George Osborne, who is keen to start selling off the government’s 79pc stake in the bank this year.
The state-backed lender is set for £3.5bn in restructuring costs as it winds down its investment bank operations and cuts back its global presence.
However more unpredictable costs include the upcoming fine in the US over sales of toxic mortgage-backed securities before the financial crisis.
Barclays’ Rohith Chandra-Rajan believes that and other conduct costs will amount to £4.5bn this year, taking the total hit to RBS’ finances to £8bn in 2015.
However Mr Chandra-Rajan expects the turnaround in the bank’s core UK retail and business bank to continue underneath these costs, resulting in a dividend being paid next year.
He predicts a payout to shareholders of 30pc of profits next year, rising to 60pc in 2017.
George Osborne wants to sell off the taxpayer’s stake in RBS
“We expect capital return of c90p between ordinary dividends and other distributions by 2018,” Mr Chandra-Rajan said today in a note to investors.
However, he has a target price of 350p on the stock. Although that is above the 338.4p at which the shares are currently trading, it remains well below the 407p the taxpayer needs to turn a profit on the bailout.
Mr Chandra-Rajan continues to prefer Lloyds Banking Group as an investment option, arguing it has more potential to return capital to shareholders.
His prediction of an improvement in RBS’ fortunes once the legal costs are out of the way chimes with that of the bank’s chief executive Ross McEwan. At the bank’s annual general meeting last month, Mr McEwan said the bank should return to normality by 2019.
“Between now and 2019, the exit bank will occupy a diminishing amount of our time, allowing us to increasingly focus on becoming a substantially UK and Ireland-focused retail and commercial bank with a core wholesale banking offer,” Mr McEwan told the bank’s shareholders in Edinburgh.
“At that point we will be operating from a much lower risk profile, and be capable of delivering solid, sustainable returns.”
However, analyst Ian Gordon from Investec had a more positive forecast for RBS. He predicted the US mortgages fine would come in at “only a few hundred million dollars” above the bank’s £2bn provisions for the fine. His target price for the stock was 395p – still below the break-even level, but far closer than the Barclays estimate.
RBS declined to comment.