Analysts Downgrade RBS

Royal Bank of Scotland has made considerable progress in its transformation, but still has quite a ways to go to recover the success of the past say Morningstar equity analysts

Erin Davis 5 May, 2015 | 3:38PM
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Royal Bank of Scotland (RBS), formerly a dominant U.K. bank, was undone by its global ambitions, in our opinion. RBS destroyed its narrow economic moat with its reckless acquisition of ABN AMRO at the peak of the market bubble in 2007. The bank was bailed out to the tune of £45 billion by the U.K. government, but has since lost it all, and then some, on dodgy assets and misconduct.

RBS has made considerable progress in its transformation, but still has quite a ways to go. RBS's bad-bank assets, just £11 billion at the end of 2014, are down 95% from their peak, but the group is left with aging computer systems, overly complex product offerings, and a well-deserved reputation for poor customer service. We think that the additional clean-up costs, estimated at £2 billion through 2017, along with £4 billion of misconduct provisions, will eat up much of the bank's operating profits through 2016. Income on asset sales will be used to prop up the group's capital ratios – shareholders shouldn't expect to see material capital return until 2016 at the earliest, in our opinion.

We think that the risk of interference from RBS's largest shareholder, the U.K. government, has largely played out – it's clear now that the government is firmly in control and has dictated much of RBS's strategy. RBS set its new strategy in place in early 2014 – it will be a U.K.-focused bank, earning the bulk of its income from retail and corporate banking, with only a small investment bank aimed at meeting the needs of its corporate clients.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
NatWest Group PLC193.05 GBX1.98Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.

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