Interesting choice of words from RBS chief executive Stephen Hester, warning – when the bank unveiled a 2012 operating profit of £3.5 billion on Thursday, up from £1.8 billion in 2011 – that it still “faces another choppy year ahead of us”. The day before, in front of tens of thousands of pilgrims in St Peter's Square, in his last public audience before resigning, Pope Benedict XVI had talked of the “choppy seas and headwinds” he had faced during his papacy, lamenting that at times "it seemed that the Lord was sleeping".
At least Hester did not have to take to his popemobile for three circuits around the assembled faithful. But he did request a form of dispensation from analysts and shareholders.
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| Stephen Hester, RBS |
The problem with declaring in the first line of the results highlights a healthy looking operating profit, is that RBS asks investors to ignore the fact it actually delivered a £5.2 billion pre-tax loss. This inconvenient detail was relegated to the fourth line of the results announcements. Hester briefly acknowledges: “It was a big loss,” before making his dispensation plea: “Of course, most of that was technical in accounting terms,” and quickly pointing back to that more re-assuring first line item: “Our underlying profit is the highest we’ve achieved since 2008.” Is it fair for RBS to guide the discussion to the operating profit like this, or does it raise the possibility that investors that focus on it might be sleeping?
Let’s look at those technical accounting items. The biggest was a £4.6 billion charge against the increased value of the bank’s own debt. It is indeed an utter aberration of accounting that RBS should be asked to account a loss for this, as if its financial staff had suddenly lost their senses and decided to buy it all back at a premium to par. They haven’t. They’ll let it roll off and, if the bank’s credit fundamentals continue to improve, replace it at a lower cost.
More questionable are some of the other technical accounting charges that RBS expects dispensation for in presenting its results. The bank lists, among others, charges for the asset protection scheme; payment protection insurance costs (£450 million); interest rate hedging products redress and related costs (£700 million); regulatory fines (£400 million); sovereign debt impairment and interest rate hedge adjustments on impaired available-for-sale sovereign debt.
Now, just hold on a minute. Many of these items – the fines, the compensation to various groups of customers that were mis-sold either interest rate hedges or payment protection insurance – are actual cash outgoings. These are the costs of doing business for which the bank has previously booked revenue and profit. Its choice should be either to go back and re-state previous P&L that omitted these costs, or to accept them now as a hit to the bank’s operating profit, just like NPL charges, funding costs, paying staff salaries or suppliers for BlackBerries and stationery.
The bank will try to present these items as exceptional one-offs. But are they?
In 2011, RBS delivered a pre-tax loss of £766 million when the exceptional one-off items also included charges for payment protection insurance. In 2010 it pointed shareholders to an operating profit of £1.9 billion, while actually delivering a pre-tax loss of £1.1 billion partly thanks to asset protection scheme charges.
These one-offs look like a persistent and regular feature of its results.
Euromoney isn’t just picking on RBS. Barclays has just done much the same. All banks do.
The problem with concentrating on apparently healthy operating results and ignoring the actual is that it might feed a complacent notion that the banking business is basically fine and will provide rich returns to investors when all the one-offs no longer drag results down. Hester and his peers at other banks want investors to believe this. He says: “We’re still cleaning up the big mess from the past.”
It’s worth asking why banks had to boost their previously accounted revenues and profits through persistent mis-selling and other misdeeds, including fixing Libor. One driver of this apparent greed might have been bankers’ realization that underlying business models were broken and that banks couldn’t wring acceptable results any other way. The danger is that by now relegating the resultant costs of these mis-deeds and pretending they are mere one-offs, bankers might still not have faced up to this. Until they do, investors should indeed brace for more choppy days ahead.
