LONDON — The CEO of Royal Bank of Scotland (RBS) thanked staff for their dedication and determination in a memo sent on Friday and seen by Business Insider, saying the lender has “taken a substantial step forward in 2016.”
The memo from Ross McEwan was sent to staff after full-year results, also on Friday, showed RBS made a £6.9 billion loss in 2016, its 9th straight year of losses.
McEwan says in the memo that the loss was driven by “substantial one-off costs for legacy matters,” which have been “been fundamental to moving the bank forward.”
RBS required a £45 billion state bailout in 2008 as the financial crisis dawned. Rival lender Lloyds also required a bailout and the government has recovered over 90% of its investment. However, RBS has struggled to repair bank, with a huge number of legacy issues such as fines for bad behaviour.
Mark Bailie, an RBS banker tasked with running the “bad bank” created after the crisis, told the FT last year that dealing with the lender’s pile of toxic and unwanted asset was like “defusing the time bomb.”
McEwan told staff in Friday’s memo: “We’re approaching a level of normality the bank has not had since before the crisis,” as a result of clearing up issues such as a shareholder action over the bank’s 2008 rights issue, agreeing on a settlement for small businesses that went through its controversial restructuring unit, and dealing with PPI payments.
RBS only has two major legacy issues left to resolve: a fine from US authorities over the mis-selling of mortgage-backed securities in the run up the financial crisis; and the fulfillment of EU state aid obligations, with a new proposal being considered.
However, McEwan warns in his memo that the bank faces “a backdrop of economic and political uncertainty” and must continue to make changes to the bank to guard against the future. A key part of this transformation involves “reflecting our customers’ accelerating shift to banking and communicating with us digitally,” according to the memo.
“We will support our customers’ move to digital by using data to understand their needs better, and having fewer but better processes,” McEwan writes. The digital investment will help RBS save a further £750 million this year, he adds.
RBS declined to comment on McEwan’s memo to staff when contacted by Business Insider.
Here’s full memo CEO Ross McEwan sent to staff on Friday:
I have said in the past that we could expect 2016 to be a tough year for the bank. We have taken substantial one-off costs for legacy matters — including conduct and litigation issues such as Residential Mortgage Backed Securities (RMBS), the 2008 shareholder rights litigation, a provision for an alternative proposed solution for resolving our EC State Aid obligations around the business previously known as Williams & Glyn, GRG remediation, and PPI. We also retired the Dividend Access Share. All of these actions represent progress in putting the past behind us, but they have also contributed to an overall loss for the year of £7.0bn. It is always disappointing to report a loss and I know it is extremely frustrating for shareholders and for all of us as colleagues, but there is some important context to today’s numbers.
These provisions and charges have been expensive, consumed a lot of our focus and taken their toll on colleagues — but have also been fundamental to moving the bank forward. As we stand today, we have two key legacy issues to conclude: RMBS, where we have recently taken a further £3.1bn provision, but have still to reach a settlement; and Williams & Glyn, where HM Treasury have proposed an alternative to conclude our State Aid remedies. If agreed, this would replace the requirement to divest the business. This means we’re approaching a level of normality the bank has not had since before the crisis. Subject to providing fully for these two remaining legacy issues in particular, we can now anticipate a welcome return to profitability for the 2018 financial year.
Over the past couple of years there has been a lot of noise and one-off costs that have overshadowed the real progress we are seeing in the core bank. Stripping out the one-off costs, the adjusted operating profit for the core was £4.2bn for 2016, up 4% on 2015. The core bank has now generated an average of £1bn operating profit for the last eight quarters. Across PBB and CPB, we’ve seen net lending growth of 10%, well above our 4% target. Again, we’ve met our annual cost target, cutting expenses by £985m and reducing the adjusted cost to income ratio from 72% to 66%. Our effort to build capital in the past two years have allowed us to absorb the impact of the one-off charges mentioned, and our Common Equity Tier 1 ratio sits at 13.4% at the end of 2016, above our 13% target. For a straightforward run through the numbers reported today, I’d recommend everyone takes a few minutes to read our Results Explained pack.
As we start to leave our legacy issues behind, and with a strengthening core bank, we have a solid launch pad for the next stage of the bank’s recovery. We have made good progress on improving customer service over the last few years, but it’s now time to re-double our efforts on customer obsession. Key to this will be reflecting our customers’ accelerating shift to banking and communicating with us digitally. We are already delivering faster, simpler and safer products and services through digital platforms, and there is much more to come. We will support or customers’ move to digital by using data to understand their needs better, and having fewer but better processes. This will allow us to deliver the proactive service that underpins our brand position, and at a much lower cost. Against a backdrop of economic and political uncertainty, this is essential to delivering a sustainable long term future for the bank and we have announced plans to take out a further £750m of operating costs in 2017. We have also set 50% cost to income ratio and 12% return on equity targets for 2020. This is a one year delay from our pre-Brexit targets, and now aligns the timing of our financial targets with our aspiration to be number one for service, trust and advocacy.
As a team, we have had to deal with circumstances over the last few years that few, if any, other companies have faced. I know that this will have had an impact on our engagement, and I want to acknowledge, and say thank you again, for the incredible determination shown by colleagues across te bank over the last few years. Big losses, whatever the context, are likely to attract more negative headlines, but we have taken a substantial step forward in 2016. If we continue with this level of determination as we move into the next phase of our plan, we can firmly set our sights on becoming number one, and work towards our first bottom line profit since 2008, something I know we are all looking forward to.
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