Two numbers from the RBS results (for anyone who has forgotten, Royal Bank of Scotland is 82% owned by the taxpayer thanks to its bubble-fuelled expansion):
1. The tangible common equity ratio is 5.2%, up from 2.4% in 2008. In other words, its shares are more than 19 times leveraged. They were almost 42 times leveraged a year earlier, but still – not much of a cushion for the shareholders here. (For 2013 they want to keep the “leverage ratio”, which is based on the larger tier 1 capital rather than equity capital, below 20 times.)
2. Stephen Hester, chief executive, has set a target return on equity after the bank has been restructured of more than 20% in commercial banking, and of 15-20% in investment banking. Both numbers taken from the slide presentation (pdf).
Neither of these is compatible with building a safe bank: the high hoped-for returns to shareholders come only because the bank will be taking big risks through its leverage, even if those risks will be lower than in the past. Unless we can get rid of the too-big-to-fail problem, RBS will be putting out the begging bowl to taxpayers again come the next crisis. It is not even planning to be a safe bank.
For balance, here’s what Hester said in his statement (pdf):
RBS is being restructured and run to serve customers well, to be safe and stable and to restore sustainable shareholder value for all. That is our legal duty and it is our intention and desire. It is also the only way taxpayers will recover the support they have given us.
There are many bigger issues here, particularly the impact on the economy of lower bank leverage (slower growth, but less painful busts). But just in case you were thinking of voting for David Cameron in order to buy subsidised shares in RBS, be aware that it is far more of a gamble than any new “Tell Sid” campaign is likely to make clear.
As an aside, RBS mentions the risks to the economy from tighter regulation in its presentation, but at least accepts that moves are needed to remove hidden state guarantees:
Thrust of regulatory change is appropriate and considered
-Key 2010 issue is “calibration” and “timetable”. Absent some “give” on both, negative consequences to economic growth and industry returns
Key medium term issue is reform to remove implicit state subsidy in times of systemic crisis
-Will take years. Solution not in individual size or shape. Needs combination of safer banks (more capital, safer funding, better risk management), and transparent, predictable crisis resolution mechanisms (loss hierarchy, “Chapter 11″ for Banks)