Friday 05 August 2016 7:14 am

RBS share price down on £2bn loss and Brexit warnings

The Royal Bank of Scotland (RBS) has reported a whopping £2bn loss for the first six months of the year, as it continues to pay the price for wrongdoing during the financial crisis.

The bank also warned investors that, given the result of the EU referendum, it was unlikely to hit its medium-term targets and downgraded its expectations for this year's performance.

Shares tumbled by more than five per cent at the open to 181p.

The figures

The bank, which is still 73 per cent owned by the taxpayer, said its attributable loss had ballooned by a factor of more than eleven in the first half of the year. The bank came in £2,045m in the hole, compared to a £179m shortfall in the same period last year.

The steep loss was put down to two separate billion-pound payouts for hangovers from the financial crisis. In the second quarter, the bank paid out £1.315bn in litigation and conduct charges, including PPI compensation payouts and shareholder action against the bank's 2008 rights issue.

This was on top of the £1.193bn dished out in the first quarter under a scheme that will allow the bank to start paying dividends again.

The bank's operating loss came in at £274m, down from a £261m profit in the first half of last year.

RBS' net interest margin – under much closer focus given the low interest rate environment – was 2.18 per cent for the first six months, slightly up from 2.14 per cent last year.

The loss came despite a £253m boost to the bank's bottom line due to "the significant weakening of sterling against the dollar following the EU referendum".

Why it's interesting

RBS simply cannot seem to let go of the past, with another billion-pound hit from conduct charges and litigation fees. The string of issues the bank has already coughed up for in the first half of the year was so long the bank couldn't list them all in the introduction to its half-year report.

Wrongdoing includes "provision in respect of PPI … the UK 2008 rights issue shareholder litigation, an industry-wide examination of tracker mortgages in Ulster Bank … and various other matters," according to the group.

The future doesn't look to be too bright for the bank either, with a warning of "headwinds from the reduction in interchange fees, low interest rates and the uncertain macroeconomic environment" following the EU referendum.

In 2012, RBS investors were given 10 'new' shares for every 1 of the old ones, causing the share price to jump 10-fold, as a result. Despite the headline movements in the share price, a holding in RBS is now worth three per cent of what it was before the crisis.

RBS didn't shy away from branding Brexit bad news for its business – despite a £253m boost to its balance sheet due to the weakening of the pound. Its risk weighted assets (RWA) are set to fall to between £30bn and£35bn by the end of the year, down from closer to £50bn in 2015, as a result of the vote.

That could worry the bank – and regulators – given its poor performance in the European Banking Authority's recent EU-wide stress tests.

RBS also blamed IT clitches for holding up the spin-off of Williams & Glyn as it shelved plans for an IPO but said it was continuing to explore other avenues for getting rid of the 300-branch network. Last week, Santander reportedly made a bid for the outfit, which RBS is required to sell by the end of 2017.

What RBS said:

Announcing the losses, RBS said:

The outcome of the UK's EU referendum has created considerable uncertainty in our core market and we continue to assess all its implications. In the current low rate and low growth environment, achieving our longer term cost-to-income ratio and return targets by 2019 is likely to be more challenging.

Whilst RBS remains committed to achieving its priority targets for 2016, we recognise that market conditions have become more uncertain following the EU referendum result and we have updated our guidance.

It also raised the prospect of more legal fees later this year:

We continue to deal with a range of uncertainties in the external environment and we will also have to manage conduct-related investigations and litigation… throughout 2016, and substantial related incremental provisions may be recognised during the remainder of the year.