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RBS CEO Alison Rose warns of cuts to come as investment banking unit struggles

Royal Bank of Scotland Group PLC's new CEO Alison Rose has promised to unveil her strategy for the state-owned lender in the New Year but has already told staff that cutting costs will be critical.

The bank's third-quarter results underlined the challenges she faces as it reported an attributable loss of £315 million, dragged down by a £900 million provision for mis-sold payment protection insurance.

"Not all of these decisions will be easy but we have got to take them nonetheless," Rose told staff on taking over.

RBS was at the center of the financial crisis and preventing its collapse cost U.K. taxpayers £45 billion. It remains 62% state-owned. Rose told staff that "continuing to reduce the bad costs at the bank, safely but at pace … is going to be critical."

RBS CFO Katie Murray warned at third-quarter results that net interest margin for the bank excluding NatWest Markets, at 1.97% in the quarter, was five basis points lower than in the second quarter. Group NIM was 1.75% in the third quarter, down on both a quarterly and yearly basis. Murray also refused to commit to the lender's previous target for return on tangible equity of 9.5% in 2020.

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The performance of NWM, the bank's investment banking arm, in the third quarter was "deplorable," according to analyst Joseph Dickerson at Jefferies. The division's total income dropped to £150 million in the quarter from £569 million in the same quarter last year. It reported an operating loss of £193 million compared with a profit of £87 million a year ago.

"The problem is that the £184 million of core income is generated on a £348 million cost base in that unit," wrote Dickerson in a note on the results.

NWM is a 'sticking point'

NWM is likely to face intense scrutiny under Rose who is facing calls for her to ax the division. Murray warned when unveiling third-quarter results that NWM would not hit previous income guidance targets.

"We think a reduced perimeter, perhaps moving to a white-label or joint-venture approach, to release capital, cut complexity and improve the group return on tangible equity makes sense," said UBS analyst Jason Napier in a research note. Napier described NWM as the "key sticking point in the quarter."

At its results, RBS stuck to its target of bringing expenses down by £300 million in 2019.

"Costs are within our control, and we remain committed to taking out £300 million this year, having taken out £193 million to-date," said Murray.

The bank has guided to £1.2 billion restructuring charge for this year, bringing its total post-crisis restructuring bill to £17.00 billion.

Rose will unveil her strategic plan for the bank in February.