RBS beats forecasts with Q3 profits, but warns of further charges - UPDATE
Royal Bank of Scotland swung to a better-than-forecast £1.3bn in the third quarter of 2014, compared with a loss the year before, and said it was making early progress in its strategy to create a "simpler, clearer and fairer" bank.
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The part-nationalised lender also confirmed that it would be keeping Irish arm Ulster Bank following a strategic review, after speculation that the unit could be sold.
The better-than-expected profits and improvements in the balance sheet were taken positively by the market on Friday, with the stock up 3.6% at 378.6p by 09:44.
However, management warned that it still has a "long list" of conduct and litigation issues to deal with in the future.
RBS reported a pre-tax profit of £1.27bn for the July-September period, up from £1.01bn in the second quarter and a loss of £634m in the third quarter of 2013. Analysts had expected a figure closer to £1.1bn.
The third quarter included a net impairment provision of £801m, mainly from Ulster Bank and RBS Capital Resolution, and litigation and conduct costs of £780m.
RBS, which passed the European Central Bank's continent-wide stress tests earlier in the week, said it had made "excellent progress" in strengthening its balance sheet, with the common-equity tier-1 capital ratio up 70 basis points (bp) over the third quarter at 10.8%. This marks a 220bp improvement since the start of the year.
The company's leverage ratio - which will be tested in the UK Financial Policy Committee's (FPC) own health check - improved by 20bp to 3.9%. The FPC is widely expected to introduce a leverage ratio threshold of between 4-5% when it announces its review at 14:00 on Friday.
Personal and business banking saw income grow 3% during the period, while operating profit increased 66% quarter-on-quarter (q/q) to £881m. Commercial and private banking increased income by 1%, while operating profit rose 23% q/q to £471m.
However, corporate and institutional banking had a "weak" quarter, RBS said, generating an operating loss of £557m due to lower income, as well as litigation and conduct costs of £562m. £400m of these costs related to potential costs following investigations into alleged manipulation of the foreign exchange market.
On a positive note, adjusted operating expenses fell 5% over the quarter and the bank said it remains on track to hit its £1bn operating-cost reduction target for 2014.
"In February I placed trust at the heart of my new strategy for our bank. We have taken the first steps towards that goal, with early progress in making RBS simpler, clearer and fairer," said chief executive Ross McEwan. "We are reducing costs, and are on track to achieve our capital targets. UK and Ireland are showing signs of growth, and impairment trends are significantly better than we had anticipated at the start of the year," he said.
McEwan said that Ulster Bank remains a "core part of our bank". He said: " We have a good market position and believe that, with investment, Ulster Bank can deliver attractive shareholder returns in the future."
However, he added: "But we know we still have a long list of conduct and litigation issues to deal with and much, much more to do to restore our customers' trust in us."
Analyst Gary Greenwood from Shore Capital said the decision to keep Ulster "probably makes sense given the improving Irish economy".
Shore kept a 'hold' rating on the stock, with Greenwood saying: "RBS is clearly seeing good momentum in terms of improving underlying earnings and capital strength, which are generally running ahead of market expectations, but the unresolved conduct and litigation risks cannot be ignored."