RBS prepares for Brexit uncertainty, to cut more costs

By Andrew MacAskill and Sinead Cruise

EDINBURGH/LONDON (Reuters) - Royal Bank of Scotland (RBS.L) Chairman Howard Davies said the state-backed bank was preparing for a potential phase of economic instability following a referendum on Britain's membership of the European Union.

Speaking at the bank's annual investor meeting in Edinburgh on Wednesday, Davies said the vote was generating additional uncertainty in a sector already buffeted by low interest rates and economic volatility, but RBS would continue to support its customers whichever way the British electorate votes on June 23.

"We are not one of those financial institutions whose core business depends critically on unfettered access to the EU markets, though our Irish and Western European businesses are significant," Davies told shareholders.

"But if a vote to leave the EU leads to a slowdown in growth, as the Treasury, Bank of England and most other economic forecasters suggest, that would be an unwelcome headwind for your company," he said.

RBS, which was rescued with a 45.5 billion pound ($66 billion) taxpayer bailout at the height of the financial crisis, is in the midst of a major restructuring and has not made a profit in eight years.

Davies told investors who were bemoaning the costs of compensating customers mis-sold payment protection insurance that the beginning of the end of the costly affair was in sight.

"We have made provisions of 4.3 billion pounds for PPI redress and our current modelling assumptions suggest we have sufficient provisions to take us through to the 2018 deadline," Davies said, in response to an investor question.

BONUSES

While the PPI scandal was almost over, both Davies and Chief Executive Ross McEwan said the bank still faced multiple challenges in its journey back to full financial health.

RBS is braced for the biggest fines in its history to settle U.S. investigations into claims it misled investors in mortgage-backed securities.

It also faces possible lawsuits from former customers who allege the bank's Global Restructuring Group drove small businesses into bankruptcy to make a profit during the financial crisis.

On the sidelines of the meeting, McEwan told reporters RBS was considering an out-of-court settlement on a case brought by shareholders who lost money after the bank's 2008 rights issue.

The New Zealand-born executive said RBS had made progress in restoring its tarnished reputation among borrowers, launching new current account products offering 'cash-back' on household bills and mailing 12,500 'statement of appetite' letters to businesses offering up to 8 billion pounds of new lending.

Besides targeting a 12 percent return on tangible equity, McEwan said the bank would reduce costs by at least another 800 million pounds over the course of 2016.

Some 650 million pounds of these cuts will come from closing down parts of its international business and investment bank, with the remainder from its core businesses.

"Let's face up to the reality in banking that usage of the branch network is declining not just here, but around the world," McEwan said, in response to a question about RBS closing more branches than any British bank last year.

"Do you want this bank to stay back in an old world and be saddled with that cost? Unfortunately I am not prepared to do that," he said.

The tough line on costs was also reflected in management's comments on bonuses, which Davies said had spiralled out of control. "RBS has done more than any other bank to bring down pay and these exaggerated bonuses," he said.

The bonus pool at the investment bank shrunk by 37 percent over the last year.

($1 = 0.6898 pounds)

(Reporting By Sinead Cruise and Andrew MacAskill; Editing by Rachel Armstrong and Jane Merriman)