I was against the state bailing out RBS lock, stock and derivative. I wanted the last government to preside over putting it into an orderly administration, where depositors and other essential interests were protected. The rest should have suffered losses to sort the mess out quickly. A managed administration could have avoided worse systemic damage than we experienced going the government’s way.
I wanted them to sell off the overseas banks, the Investment bank, the insurance company and the rest, and let the shareholders and the bondholders take the losses they deserved. Instead the Labour government decided to subsidise and prop the whole range of businesses trading under the RBS Group. The incoming government largely continued the previous government’s strategy. The idea is to let the management sort the Group out, with only modest disposals, with a view to selling the state’s shareholdings at a profit in due course.
So how are they getting on at RBS? Last week the shares slumped to a new low of 24 pence, meaning we taxpayer enforced shareholders at today’s prices have lost more than half the money we were made to invest in the Group’s shares. Anyone who knows the history of UK nationalisation will not be surprised.
The Group produced its half yearly results recently. These showed that the bank has done a good job complying with regulatory requirements to have much more cash and capital relative to its business activities, and to get its loans below the level of the deposits. I would say it needs to do no more to strengthen its balance sheet according to regulatory measurements. It has gone from a Tier One Core Capital ratio of a too small 4% to an impressive 11.1%, and has moved from leverage of a mind blowing 28.7 times to a more conservative 17.8 times. Job done.
What is altogether more disturbing are the losses still being incurred, and some of the investment decisions being made. In the first half the Group lost £678 million before tax. Those losses are largely down to the taxpayer to pay. No-one raises issues about them in the Commons apart from myself, and no-one seems to think they are avoidable. Yet those losses represent the excess of RBS spending and cost over its revenues. If it cannot get its revenues up it has to get its costs down.
In Quarter Two 2010 income was £396 million lower than Quarter Two 2010. Costs were only £211 million lower. That is not the way to bring a company into profit. Core total income for the half year fell by £1177 million, whilst costs rose by £36 million. The half year saw losses of £850 million on Payment Protection Insurance recognised, and £733 million losses on Greek sovereign debts. The management calls these “issues of the past”.
I can sympathise with them about the PPI. That is largely down to previous managements. I hold the present management to account for the Greek sovereign debts. Why would anyone have held Greek debt over the last couple of years? Have they not been reading the warnings and hearing the alarms sounded like the rest of us? What part of Euro crisis and Greek bankruptcy – the Greek state’s inability to borrow in the normal way in the markets to pay its bills – did they not understand? Why was a state bank still in Greek debt?
For that matter why did RBS increase its holdings of Italian debt to £955 million in time for the crisis in their bonds? And why was it adding a little to its Spanish debt position? Total debt securities are up by £12 billion on the quarter, and £26 billion over the half year.
Its portfolio of sovereign and financial bonds rose by 12% or £26 billion whilst its portfolio of loans and advances to customers fell 2% or £9.5 billion. It did meet its UK business lending target. It still holds £394 billion in derivatives and £95 billion in loans to other banks, compared to £545 billion of customer loans. It has a substantial US and European business on top of its UK business, and a large investment bank.
I see no reason for UK taxpayers to be subsidising the losses of such a Group. The bank should be told to make more rapid progress with selling off its different businesses to cut risk and bring in cash. UK taxpayers should not be punting in Euro sovereign debts in the middle of such a crisis. It would be easy to cut the size of the RBS balance sheet, cut the risks and get some cash back.