RBS – lots of losses for taxpayers

The headline figures tell you losses have been reduced, and the investment bank has made some money. The full statement also reveals:

The bank’s balance sheet has been cut. Gross assets are down by almost £700 billion to £1522 billion. The bank wishes to make a further reduction, taking off probably around £300 billion more.

Net tangible equity, which was stated as 73.8 pence per share in December 2008, has fallen to 51.3 pence in December 2009.

Operating expenses are up from £13.5 billion to £14.954 billion.

The non core operating loss is up from £11.3 billion to £14.6 billion. The total operating loss is down slightly from £6.9 billion to £6.2 billion. Insurance claims are up. Impairment losses on both the core and non core businesses are up (that’s allowances for bad debts etc).

The new Tier One Capital ratio is up to 11% from 5.9%, so the bank is now financially much stronger thanks to the slimming of the balance sheet and the new capital injected.

The questions to ask include:

1. Why have operating expenses risen so much when the bank is being slimmed? Are the bonus arrangements really appropriate given the overall loss making nature of the bank?

2. What action is being taken to control impairment losses?

3. What action is being taken to improve the insurance divisions results?

4. If the aim is to reduce a bank with a £2.2 trillion balance sheet to a bank with around a £1.2 trillion balance sheet, what impact will that have on the value of the shares?

5. Couldn’t more of the risk reduction and balance sheet slimming be done by selling businesses from within the Group?

The government missed a big opportunity to impose controls on cash bonuses before the Group is profitable overall when it failed to make that a condition of the new capital. Surely the best way to motivate new staff being recruited, or existing staff when renegotiating contracts, is to give them incentives geared to the realisation of profits for taxpayers?

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19 Comments

  1. Norman
    Posted February 25, 2010 at 10:18 am | Permalink

    I don't fully understand all of the above so would be obliged if someone could tell me if my understanding of this is right or wrong.

    RBS had £2.2 trillion of 'assets' – I imagine the majority of these assets are loans to / investments with third parties for building in Dubai, mortgage packets from other banks, etc.

    £700bn of these have now been shifted – I understand this to mean RBS has been hawking the above listed assets around and other institutions have bought them. £300bn more are to be hawked around.

    RBS was brought to it's knees by buying too much toxic assets and it still has a lot of these on the books which necessitated the setting up of the insurance scheme last year. The figure of £700bn was being touted for the state owned banks.

    If the above is correct is it not the case that all the decent assets would be included in the trillion being sold off and the taxpayer is being left with all the less desirable ones?

    I could understand such a course of action before we saved the world's banking system but I query the wisdom of doing this now if we want to recoup our money, as well as protect ourselves from future losses from toxic assets by having a decent amount of non-toxic also on the books.

    Reply: The gross assets included investment bank holdings of various financial instruments. They have not necessarily sold off all the good ones. They have divided the business into core and non core, and they are trying to create a good sustainable business for the future.

  2. Tim Almond
    Posted February 25, 2010 at 10:59 am | Permalink

    The bonuses make sense if they are in the context of individual staff targets. A company can make a loss, yet you'd still want to reward successful salesmen – at least they're helping to reduce that loss.

    The real problem is that we, the public, are paying for this loss and never should have been forced to do so.

    The government set a terrible principle about the principles of business. Business owners should, through a combination of risk-taking, good management and innovation, be allowed to become very rich. What the government has done instead is to socialise the losses and the risk so that I am paying for a business which I have no interest in saving, to no reward to me.

    This principle is also good for society because we throw out the less good to replace with the good. Some banks and nearly all building societies managed their affairs properly. They should reap the rewards of their good management.

    Sadly, none of the 3 main parties were willing to defend this principle.

  3. Colin D.
    Posted February 25, 2010 at 11:41 am | Permalink

    RBS are going to dish out £1.3 billion in bonuses to the same people that brought RBS to its knees. We are paying for these people's folly.
    RBS say they must keep the bonuses to retain the best staff. This is the con of the century! Call their bluff! Get rid of the bonuses, once and for all. It would be a sure fire vote winner. And even if RBS are right and some of the 'best' people go, they might lose 6 billion next year instead instead of 5. And you know what? … nobody will even notice. Quite regardless, voters will still believe that to get rid of the running sore of these obscene bonuses was the right thing to do.
    Has Cameron got the guts to do it?

  4. Lola
    Posted February 25, 2010 at 11:53 am | Permalink

    Answers:

    1. Because it is now part of bloated self serving state bureaucracy
    2. None. (see (1) above)
    3. None (see (1) above)
    4. It will roughly halve them, assuming that the market vaue of the business equals its balance sheet value. Likely as not, given its condition, the market capitalisation will be less than the balance sheet value.
    5. Yes.

    Last para. Of course it did. But the governments actions on the failed banks were nothing to do with doing anything sensible but all to do with saving Brown's useless arse. And the bank is now part of dependent and entirely producer captured self perpetuating state bureaucratic machine.

  5. THE ESSEX BOYS
    Posted February 25, 2010 at 1:32 pm | Permalink

    "Surely the best way to motivate new staff being recruited, or existing staff when renegotiating contracts, is to give them incentives geared to the realisation of profits for taxpayers?"

    We agree. For a start Mr Hester should recieve no bonus until the shareholders duped by the rights issue and others who saw the original share price plummet in the Goodwin era have been adequately compensated. 70p per share just doesn't do it.

    • THE ESSEX BOYS
      Posted February 25, 2010 at 2:20 pm | Permalink

      By the way we're hoping to see you talk this weekend in Brighton.
      Is that on the agenda?

      Given we Essex Boys' much-repeated mantra of a COMMON SENSE & COMPETENCE message in response to that oft-heard question "Just what does David Cameron stand for?" and to – as Boris put it in Manchester – 'CURT THROUGH THE NONSENSE' we had one of those email circulars in this morning. iT'S worth reproducing BELOW for those who haven't seen it.

      So much ammunition! We hope, after seeing you fight such a doughty rearguard action on The Daily Politics this week, that the leadership will sharpen its act, streamline its message and bring in the professional communicators to get across the facts of Labour ineptitude and waste and score the open goal that beckons!

      ******

      EMAIL: An Obituary printed in the London Times – not a joke and makes you think

      Today we mourn the passing of a beloved old friend, Common Sense, who
      has been with us for many years. No one knows for sure how old he was,
      since his birth records were long ago lost in bureaucratic red tape. He
      will be remembered as having cultivated such valuable lessons as:
      Knowing when to come in out of the rain; Why the early bird gets the
      worm; Life isn't always fair; and Maybe it was my fault.

      Common Sense lived by simple, sound financial policies (don't spend
      more than you can earn) and reliable strategies (adults, not children,
      are in charge).

      His health began to deteriorate rapidly when well-intentioned but
      overbearing regulations were set in place. Reports of a 6-year-old boy
      charged with sexual harassment for kissing a classmate; teens suspended
      from school for using mouthwash after lunch; and a teacher fired for
      reprimanding an unruly student, only worsened his condition.

      Common Sense lost ground when parents attacked teachers for doing the
      job that they themselves had failed to do in disciplining their unruly
      children.

      It declined even further when schools were required to get parental
      consent to administer sun lotion or an Aspirin to a student; but could
      not inform parents when a student became pregnant and wanted to have an
      abortion.

      Common Sense lost the will to live as the churches became businesses;
      and criminals received better treatment than their victims.

      Common Sense took a beating when you couldn't defend yourself from a
      burglar in your own home and the burglar could sue you for assault.

      Common Sense finally gave up the will to live, after a woman failed to
      realize that a steaming cup of coffee was hot. She spilled a little in
      her lap, and was promptly awarded a huge settlement.

      Common Sense was preceded in death, by his parents, Truth and Trust, by
      his wife, Discretion, by his daughter, Responsibility, and by his son, Reason.

      He is survived by his 4 stepbrothers;
      I Know My Rights
      I Want It Now
      Someone Else Is To Blame
      I'm A Victim

      Not many attended his funeral because so few realized he was gone.
      If you still remember him, pass this on. If not, join the majority and do
      nothing.

      • THE ESSEX BOYS
        Posted February 25, 2010 at 2:27 pm | Permalink

        Sorry Boris – CUT thru the nonsense of course!
        Thats curt enough!

  6. Andrew Johnson
    Posted February 25, 2010 at 1:37 pm | Permalink

    Very well put – couldn't agree more!

  7. David B
    Posted February 25, 2010 at 2:31 pm | Permalink

    I would also like to know:

    1. How much have RBS lent to the government by way of purchase of gilts.

    2. How much have they lent to the SME sector in the UK and how has that changed, year on year, over the last 3 years

    3. What is the long term strategy of the bank and when is the expected date for a return to the private sector

  8. Giles
    Posted February 25, 2010 at 3:08 pm | Permalink

    Isn't the answer to the bonus question something to do with the split between profits made by the investment bank and those made on retail?

  9. gac
    Posted February 25, 2010 at 3:32 pm | Permalink

    Is it a co-incidence that the increase in operating costs matches the bonus payments agreed with the Treasury?

    Either way there has been no slimming down unless the accounts also show huge redundancy/loss of office payments.

  10. Sally C.
    Posted February 25, 2010 at 8:14 pm | Permalink

    I thought that this post from FT Alphaville today was interesting:
    http://ftalphaville.ft.com/blog/2010/02/25/158591

  11. Mike Stallard
    Posted February 25, 2010 at 10:13 pm | Permalink

    I am going to London next week. I shall not be dining at the Angus Steak House. I shall not be taking afternoon tea at the Ritz.
    Obvious really.
    So why are our broke government actually trying to mix with bankers? You mentioned £2.2 trillion being reduced to £1.2 trillion. When the current government took over, their annual income was just about £700 billion. What experience on the shop floor do any of the current front bench have in banking?
    What if the whole RBS goes belly up? Unlikely? Say Spain defaults? Or Greece? Or Dubai? Or Kuala Lumpur? What happens when the venerable and well loved King of Thailand dies? (Big RBS branch there).
    And what do most back bench politicians (present company always excepted) know about banking? Look at the idiotic vote catching over bonuses!

    • backofanenvelope
      Posted February 26, 2010 at 10:40 am | Permalink

      The answer to your question is obvious. They know nothing. And anything they do will make things worse because there is NO situation a government will not make worse.

      I can easily Mr Redwood making a good job of supervising the banks; but the rest of them……. Maybe if the Tory party doesn't want him in the cabinet they should make him Governor of the Bank of England?

      Watching the BBC4 programme last about the Treasury stripped away any hopes I had of things getting better.

  12. Javelin
    Posted February 25, 2010 at 10:42 pm | Permalink

    John, what a lot of people don't understand is that the City is Wall Street, Silicon Valley and the American Military all rolled into one.

    It is least of all Wall Street because those who work in Wall Street, in my experience, have a similar callibre to a life and pensions company in the UK.

    It is our sillicon valley because it attracts the best entrepeneurs and IT experts in the UK.

    It is our American Millitary because it gives the UK the global reach and power.

    The City is not just our local banks it is the UK. When I see Gordon Brown attacking the City I see a unintelligent communist US President slashing and burning the US economy.

  13. Ex Liverpool rioter
    Posted February 26, 2010 at 12:04 am | Permalink

    John http://www.pressdispensary.co.uk:80/releases/c992

    May be soon, may be.
    Mike

  14. Lindsay McDougall
    Posted February 26, 2010 at 3:47 am | Permalink

    RBS Insurance boasts no fewer than 9 business brands:

    Churchill
    Direct Line
    Direct Line for Business
    Privilege
    TRACKER
    Devitt
    RBS Finsure
    NIG
    Green Flag

    Together they cover many different types of insurance, with considerable overlap – e.g. Churchill and Direct Line compete with separate television advertising campaigns. It would appear that they have not been integrated or rationalised. Also, there is little synergy with the mainstream banking activity.

    This suggests that either there is considerable scope for rationalisation and cost cutting or that these businesses could be sold on one by one after a cost control programme.

    If these insurance businesses were to be sold (but not at rock bottom prices) by RBS, taxpayers might get more money back.

  15. adam
    Posted February 27, 2010 at 2:50 am | Permalink

    good work

  16. Bazman
    Posted February 27, 2010 at 6:12 pm | Permalink

    In any normal business all the bankers would have been sacked and then taken back on new contracts the business being broken up and sold at the same time. The banks should have been saved at taxpayers expense and the bankers bluff called. Switzerland is not a real place for these people to live. The low tax is a myth and it is assumed that Switzerland and the like want or need them. They and their supporters have Got us all down as mugs. If they need motivation by bonus then they are unemployable. Why should the average employee listen to waffle about efficiency and austerity from these parasites and make no mistake that is exactly what they are. A drain on any non tax haven state. Since when has banking become a means of making money in itself? More lectures on how to run an economy from bankers? Not real. According to them they made no mistakes and have no regrets. Neither would most people having made that amount of money for blundering with other peoples money.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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