GO
Loading...

RBS pre-tax loss widens as major overhaul signaled

U.K. lender Royal Bank of Scotland (RBS) reported 2013 profit that failed to meet market expectations on Thursday, as the company continued to detail its restructuring plans, including the divestment of assets.

Analysts were expecting a pre-tax loss for 2013 of £8 billion ($13.3 billion), but the figure came in lower at a loss of £8.24 billion. Last year, RBS posted a pre-tax loss of £5.16 billion.

RBS also announced a new strategic direction with the aim of building a bank that earns its customers' trust. The bank had to be bailed out during the financial crash of 2008 and has tried to move away from the reputation it gained under controversial CEO Fred Goodwin during this period.

RBS said it would focus on the U.K. and structure itself around the needs of its customers, with seven existing operating divisions realigned into three businesses: Personal & Business Banking, Commercial & Private Banking and Corporate & Institutional Banking. It said it would lift its proportion of U.K. assets to 80 percent from 60 percent. It also detailed its plans to sell Citizens, its U.S. retail and commercial bank, which is expected to be fully divested by the end of 2016.

(Read More: RBS bonuses: Cameron to veto plans for a hike)

"With the announcement of our strategic review, we expect elevated restructuring costs in the next two years to get the bank's customer service and costs back to best in class levels in all respects," the bank said in Thursday's earnings release.

The bank - 81 percent owned by the government - signaled last week that a major overhaul was on the horizon. New chief executive Ross McEwan, speaking on a video posted on RBS's website said his aspiration was not to run the world's biggest bank, but the world's best bank. Analysts had expected this could include heavy cuts to the 11,000 jobs at its investment bank and a retreat from its U.S. and Asian markets businesses. McEwan said in a conference call on Thursday morning that it is "nowhere near" being able to put a number of any likely job cuts, according to Reuters.

Its core tier one capital ratio – a crucial measure of financial strength – stood at 8.6 percent at the end of 2013. The same ratio fell to between 8.1 and 8.4 percent at the end of last year, prompting Moody's to warn that it could downgrade the bank's credit rating.

(Read More: RBS plans dramatic scaling back)

It also added that it was targeting a cost-to-income ratio of 55 percent by 2017 and 50 percent by 2020. The bank's current ratio currently stands at 73 percent.

Staff bonuses have been a hot topic in the U.K. Fellow lender Barclays announced 12,000 job cuts with its full-year earnings in February and a slump in profits. However, it also revealed that the bank's bonus pool jumped 10 percent.

A pedestrian passes a branch of Royal Bank of Scotland Group in London, U.K., on Friday, Nov. 1, 2013.
Chris Ratcliffe | Bloomberg | Getty Images
A pedestrian passes a branch of Royal Bank of Scotland Group in London, U.K., on Friday, Nov. 1, 2013.

Britain's Prime Minister, David Cameron, told Parliament in January that RBS's cash bonuses will be limited to £2,000 ($3,284) next year, also stating he would reject any plans to hike its overall pay and bonus bill.

The move comes after the opposition Labour Party put pressure on the government to block any attempt by RBS to pay its bankers bonuses of more than twice their annual salary. The bank is reportedly planning to use a European Union (EU) rule allowing it to pay out bonuses of a maximum of twice an employee's salary, providing the move is approved by shareholders.

(Read More: RBS avoids split as $61 billion toxic loans hived off)

RBS said Thursday that it is set to pay bonuses worth £576 million for 2013, after paying £679 million in 2012. McEwan added in the conference call that he needs to be pragmatic on pay and needs to be able to pay people fairly in the market place.

Shares of London-listed RBS have climbed 4.7 percent so far this this year after a moderate rally of 4 percent last year. Its stock has steadied close to 300 pence since the beginning of 2009, after climbing to a peak of 6000 pence in early 2007. On Thursday morning its shares slumped 6 percent.

Morgan Stanley cut its price target on RBS after the results on Thursday morning. The U.S. investment bank has kept its "equal weight" rating on the U.K. lender but its price target fell from 323 pence to 300 pence.

Cormac Leech, bank equity researcher at Liberum Capital told CNBC Thursday that RBS's results in the fourth quarter were "shocking" and looked like "classic kitchen sinking." However, he expects the bank to make rapid progress this year and would soon be "highly investable."

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

Contact Earnings

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More