EDINBURGH – Royal Bank of Scotland Group plc (LSE, NYSE: RBS), the parent of Providence-based Citizens Financial Group Inc., will put 325 billion pounds ($462 billion) of investments into a U.K.-government-backed insurance program and shift toxic assets to a new unit, the bank said today after posting the biggest annual loss in British history.
The report sums up “an exceptionally difficult period in the Royal Bank of Scotland’s history,” new RBS Chairman Philip Hampton wrote in a letter to shareholders. “The external environment has seen unprecedented turbulence in bank and other financial markets and deteriorating economic conditions around the world,” he added. “Our disappointing financial results reflect these circumstances.”
For the year ended Dec. 31, RBS posted an annual loss of 8.13 billion pounds ($11.67 billion at today’s exchange rate) – compared with a year-ago profit of 8.96 billion pounds ($12.87 billion) (READ MORE) – on revenue that fell 19.93 percent to 26.87 billion pounds ($38.60 billion).
Per ordinary share, the bank posted an adjusted loss of 5.2 pence (7.5 cents) compared with its 2007 adjusted earnings of 44.5 pence (63.9 cents).
Its 2008 results included restructuring costs of 307 billion pounds ($440.22 billion); integration costs of 1.05 billion pounds ($1.51 billion) related to RBS’ 2007 acquisition of Amsterdam-based ABN Amro, up from 108 million pounds the year before; impairment charges excluding losses on reclassified assets of 6.96 billion pounds ($9.98 billion), up from 2.10 billion pounds; and credit-market write-downs and other one-time charges of 6.11 billion pounds ($8.76 billion), up from 1.03 billion pounds in 2007.
Besides its ABN Amro and Charter One acquisitions, contributors to the company’s woes have included losses on investments including consumer mortgages; mortgage-backed securities and other risky derivatives; and New York fund manager Bernard J. Madoff’s alleged Ponzi scheme. (READ MORE)
Still, “many of our businesses were profitable,” Hampton said. Excluding goodwill impairment charges, mostly from its Charter One division, Providence-based Citizens Financial would have shown an operating profit of about $465 million last year, down from $1.5 billion in 2007, based on data filed with the Federal Depositors Insurance Corporation (FDIC). (READ MORE)
Still, Hampton acknowledged, “we owe our continued independence to the U.K. government and taxpayers.” Twice last year, he said, “the group sought additional capital from shareholders. … On the second occasion, the capital-raising was underwritten by the U.K. government, and in November it became the group’s majority shareholder.”
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The U.K. government currently owns 58 percent of RBS. (READ MORE)
That stake may rise to as much as 95 percent – and 75 percent of voting shares – RBS CEO Stephen Hester told investors and analysts in a conference call this morning. And Hampton noted that the RBS board’s renumeration committee “has been working to bring about fundamental changes” in compensation policies and practices companywide, some of which were required under the U.K. bailout scheme and formalized earlier this month in an agreement with the government.
But Hampton stressed that “the U.K. government wants RBS to operate on a commercial basis.” For the most part, it “intends to act as an arms-length commercial shareholder, which will sell its interests in RBS and other banks at the earliest attractive time.”
“The last 12 months or so have been painful for our shareholders and employees and sometimes testing for our customers,” Hampton said. In the fourth quarter alone, RBS announced plans to cut its securities staff by 15 percent, and its Citizens Financial division announced plans to eliminate 900 jobs in 13 states.
“Unfortunately, however, the uncertainty is not over, and many of our people will be affected by the steps we must take to restore RBS to strength,” the RBS chairman continued. But he pledged to “move as swiftly as possible where changed is required,” and to “work to ensure that those affected … are the first to know about it.”
Hester – who took the helm at RBS in October, after the government ousted former CEO Sir Fred Goodwin (READ MORE) – today unveiled “a sweeping restructuring of the [RBS] Group.” The full plan will not be completed until sometime in the second quarter, he added, “but we have decided a lot already.”
• In the second quarter, RBS will create a “non-core division” to hold “risk-weighted assets … we intend to run off or dispose of over the next three to five years,” the CEO said. “Approximately 90 percent … will consist of GBM assets,” such as derivatives and commercial and residential mortgage loans. The other 10 percent will include “out-of-footprint” assets and “smaller, less-advantaged businesses within our regional markets,” he said.
(A similar “bad bank” was created by U.S.-based Citigroup Inc. (NYSE: C) in January.)
• “We have launched a restructuring plan to make efficiency savings across the group” – aimed at achieving annual savings of more than 16 percent by 2011, including certain Amro integration benefits that were not included in the 2008 report – that will include “reengineering and other measures – and, regrettably, reductions in employment,” Hester said.
For Providence-based Citizens, the restructuring will mean exiting “most activities outside [its] core footprint,” and restructuring costs “in order to reinvest in the core franchise,” the bank said today. But the parent company has no plans to sell the U.S. division, which it called a “strong franchise” that “improves group funding ratios [and] improves group geographic balance and opportunities.”
• Although RBS “will remain strong in all our major existing major global hubs,” Hester said, it plans to sell or significantly reduce its representation in about 36 of the 54 nations where it currently operates.
• The company also plans “substantive changes to management and internal processes,” some of which already have begun. For instance, Hampton said, the directors have “decided that a restructured board with fewer members would be better able to engage in the restructuring process.” A number of non-executive directors – including Sir Tom McKillop, “who chaired RBS through testing times with great dedication and integrity” – therefore have resigned this month, the new chairman said. Three new directors are to be appointed “in due course,” he added.
Going forward, “The company needs to change not just the business we do but how we do business,” Hampton said. “The path to recovery will be neither smooth nor straight,” he added, but “we can, must and will restore RBS Group to standalone financial strength.”
The RBS restructuring plan, and the bank’s participation in the U.K. toxic asset protection scheme, spurred an enthusiastic response from analysts and investors.
“It draws a line under the problems of what we know is a very weakened business,” Julian Chillingworth, chief investment officer at London-based Rathbone Brothers Plc, told Bloomberg News. “The asset-protection scheme is more generous to the banking sector than was previously thought.”
In return for the government insurance, RBS agreed to pay a fee of 6.5 billion pounds over the next seven years – in the form of preferred shares, on which the bank pays 7 percent interest – and it pledged to boost lending to U.K. businesses and homeowners by 50 billion pounds over the next two years. Meanwhile, the U.K. government said it will buy another 13 billion pounds of RBS preferred shares, and may later invest as much as 6 billion pounds more, at the bank’s discretion.
Royal Bank of Scotland Group plc (LSE, NYSE: RBS), based in Edinburgh, Scotland, is the parent of Citizens Financial Group Inc. The Providence-based commercial bank holding company and its subsidiary, RBS Citizens NA, operate more than 1,600 branches in 13 states, under the Citizens Bank and Charter One brands, plus non-branch offices in about 40 states. Additional information is available at CitizensBank.com or www.rbs.com.
