The Clearest Sign Yet of Britain's Brexit Pain

(Bloomberg Opinion) -- If you want an unequivocal example of how Brexit has hurt the British taxpayer, look at Royal Bank of Scotland Group Plc.

Since its record-breaking bail-out in the financial crisis, the Scottish lender has struggled to get back on its feet. It tried shrinking its trading businesses, shedding assets and eliminating costs – only to be stymied by a string of expensive legal settlements over past misdeeds, from benchmark-rigging to the marketing of toxic mortgage-backed securities.

Its path to recovery has now become more tortuous as the uncertainty over Britain's departure from the European Union weigh on the economy. If taxpayers were hoping to recover some of the tens of billions of pounds they sunk into RBS in its unprecedented crisis-era rescue, Brexit is making that goal significantly harder to reach.

On Friday, RBS admitted that a squeeze on margins and a slowing domestic economy mean it will be unlikely to post a return on equity of more than 12% in 2020 or be able to reduce its cost-income ratio to below 50%. Those targets were downgraded to medium-term goals, to be met in an unspecified timeframe.

The stock, down 18% since the vote to leave in June 2016, was the biggest faller among European bank stocks on Friday, sliding to as low as 202.7 pence. That's just roughly half the price the government paid for its shares.

It's not just Brexit that's the problem: Trade tensions, low interest rates, and fierce competition in the U.K. mortgage market aren't helping. Nor is the risk that RBS risks being broken up in the event that Jeremy Corbyn's Labour party takes power.

“It's a particularly tricky time for U.K. companies and especially banks,” Chairman Howard Davies said. Hurting the U.K. lender most has been the investment climate because it's become very difficult for large customers to commit to spending, he added.

Asked about the outlook for the U.K. economy, Davies pointed to the Bank of England, which yesterday lowered its growth forecast for this year on the back of slower exports and weak business investment.

Meantime, RBS also saw an uptick in impairments, which were higher than what some analysts were expecting, as the firm identified signs of strain among some single borrowers. Rising credit stress, albeit from a historically low base, is another indication of the tougher outlook.

There is one small consolation for the U.K. taxpayer. While RBS's common equity Tier 1 ratio fell to a lower-than-expected 16%, is it still well above the bank's target of 14%, giving it room to keep returning capital to shareholders. The bank said on Friday it will pay a special dividend.

Wherever the Brexit discussions head next, RBS looks to be stuck in an uncomfortable purgatory. At least Chief Executive Officer Ross McEwan, soon to depart for National Australia Bank Ltd., has an escape route. British taxpayers don't enjoy the same luxury.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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