Slowing pains

RBS's grand relaunch in danger of running aground

Royal Bank of Scotland's protracted dark ages will last much longer. The UK bank, 72 per cent owned by the government, faces higher costs after it resolved on August 5 to sell off its Williams & Glyn assets rather than turn them into a standalone business. Boss Ross McEwan's plan to turn RBS into a more domestically-focused lender once seemed sensible. But he now concedes the UK's vote to leave the European Union will make home-market profitability harder to come by.

If Brexit is painful for RBS, it would be even more punishing for an independent Williams & Glyn. RBS said earlier this year it would probably fail to hive off the business by the European Commission's end-2017 deadline, set via state aid rules. Now the near-certainty of persistently low rates leaves Williams & Glyn, which would fail to make the top 10 domestic lenders by assets, looking subscale. Yet, selling it off to one or more of Santander UK or other rivals will entail a book value loss and additional restructuring charges. Together the hit could amount to as much as 4 billion pounds in total, according to Morgan Stanley.

There was similarly bad news on litigation. Charges were almost £1.3 billion in the three months to June and pushed RBS into a £1.1 billion second-quarter loss. The UK's regulator's postponement of a cut-off point for mis-sold loan insurance claims has forced RBS to add £400 million, or a tenth - to existing provisions. Another £779 million charge relates mostly to a shareholder dispute over the bank's 2008 rights issue, which is now headed for an expensive court battle. And these aren't even the biggest problem: RBS will need extra reserves as it nears a settlement for alleged mis-selling of US mortgage securities.

The sheer scale of RBS's problems at least clears up one question. In European bank stress tests on July 29, the lender lost 745 basis points from its common equity Tier 1 capital ratio in the exercise's most conservative scenario - double that of many other banks. RBS still ended up above 8 per cent because it had such a big buffer, but its minority of bullish investors had hoped some of this could be returned to shareholders. Instead, they face years of thin gruel.