logo-loader

RBS shares rise after return to half-year profit but conduct issues continue to weigh

Last updated: 10:30 04 Aug 2017 BST, First published: 08:01 04 Aug 2017 BST

RBS
RBS shares gained in morning trading

Royal Bank of Scotland Group PLC (LON:RBS) shares rose after it revealed its first half-year profit in three years despite litigation and conduct charges as it cut costs as part of its ongoing restructuring.

The lender, which remains more than 70% owned by the government following its 2008 bailout, posted an attributable profit of £939mln for the first six months to 30 June, compared to a loss of £2.1bn the same period a year ago. 

Shares climbed 1.75% to 260.50p in morning trading.

An overhaul of the bank under chief executive Ross McEwan, which has included shutting branches, cutting jobs and offloading non-core businesses, led to cost savings that offset mounting conduct charges. The adjusted cost to income ratio for the first half was 53.1%, compared with 71.4% last year.

Legacy issues continue to drag

RBS incurred litigation and conduct charges of £396mln, including £151mln towards its settlement with the Federal Housing Finance Agency for misdeeds relating to the sale of mortgage-backed securities between 2005 and 2007.

The bank is expected to be hit with a larger penalty related to the mortgage-backed securities mis-selling scandal after it concludes negotiations with the US Department of Justice.

McEwan said he was optimistic about settling the case in the second half of this year and anticipates a hefty bill.

RBS was also hit with a £25mln charge in the first half for its settlement with investors who claimed they were misled over the bank’s financial state during a 2008 rights issue.

In its legal warnings attached to the results, the company revealed it was being investigated by the Financial Conduct Authority into compliance with money laundering rules.

“On 21 July 2017, the FCA notified RBS that it is undertaking an investigation into RBS plc’s compliance with the money-laundering regulations 2007 in relation to certain customers. RBS is cooperating with the investigation,” the bank said.

RBS sets up fund for challenger banks 

Restructuring costs came to £790mln in the first half, including expenses of cutting back its property portfolio, reshaping its Asia-Pacific arm, a £73mln settlement for the RBS Netherlands pension scheme and a £50mln provision for its Williams & Glyn branches.

RBS looks to have avoided having to sell the Williams & Glyn business after the European Commission approved its “in principle” plan to set up a fund for challenger banks. The Commission had previously ordered the lender to sell the branches as a condition of its bailout during the 2008-09 financial crisis. The bank has agreed to spend £833mln to support the scheme, which is expected to help the lender resume dividend payments. 

As RBS made progress in its reshaping of the business to focus on its core businesses, total income was £6.3bn, compared to £5.8bn the previous year. Growth was boosted by its core personal and business, commercial and private, and NatWest Markets divisions. Net interest margin was stable at 2.18%.

RBS boosts capital buffer, maintains full year guidance 

The group raised its capital position with the common equity tier 1 ratio, rising by 70 basis points to 14.8%, ahead of its 13.0% target. It also cut its risk weighted assets by £12.8bn, reflecting the disposal of assets.  

RBS said new accounting standards IFRS 9, which will be implemented in January, would have lifted CET1 by a further 0.3 percentage points if included now.

Analysts at UBS said: “IFRS 9 is expected to lead to £0.5bn in higher impairment provisions – about 20bps of CET1, before tax and expected Loss deductions – fully offset by a £1bn fair value gain on a number of loan portfolios which are moving to fair value accounting: a net 30bps uplift to CET1 and 1% increase to TNAV – a much better result than we were expecting.”

The bank also noted that RBS reduced its loan losses, with the total impairment falling to £152mln from £412mln, 9% below its forecast.

Full year guidance left unchanged, return to profit in 2018 still expected

Chief executive McEwan said: "We're doing what we said we would at our full-year results in February - growing income, reducing cost and improving returns for shareholders, while also starting to deliver a better service for customers.

"We see the first six months of this year as proof of the investment case for this bank: our path to sustainable profitability is becoming clearer and closer and we have resolved some of the most significant issues this bank faced."

RBS left its guidance for 2017 fiscal year unchanged and repeated its expectation that it will return to an annual profit in 2018, subject to “providing sUBStantially” for remaining legacy issues. 

RBS to set up Amsterdam hub after Brexit 

Meanwhile, the bank said it would move up to 150 jobs to Amsterdam after Brexit to minimise the disruption in the event of losing passporting rights.

The lender is in advanced discussions with the Dutch national bank about conducting some Natwest Markets business there and setting up a small European headquarters in the Netherlands.

RBS already holds a banking licence in the Netherlands following its ill-fated takeover of Dutch bank ABN Amro a decade ago.

'Omens look more promising for return to private hands', says ETX Capital

Neil Wilson, senior market analyst at ETX Capital, said: "A looming fine for mis-selling mortgage backed securities in the US casts a long shadow but the omens are looking a lot more promising for a return to private ownership. Based on these figures the return to genuine sustained profitability in 2018 appears a lot more realistic."

Wilson noted that RBS has earmarked about £6.6bn for the fine so far but the chances are it might need more, with RBS admitting that further sUBStantial provisions and costs may be recognised.

"Whatever else it needs to set aside may well eat up all the profits it makes in 2017," he said.

"RBS knows this and remained realistic by saying that ‘subject to providing substantially for remaining significant legacy issues in 2017, our expectation remains that we will be profitable in 2018’.

"Nevertheless there are lots of good numbers on an underlying basis as the good work in Q1 carried through..."

Shore Capital left its rating at 'hold', citing uncertainty over the pending settlement with the DoJ for mortage-backed securities. Analyst Gary Greenwood said the income and capital performance were stronger than expected and expects dividend payments will resume in 2018 when it returns to an annual profit.  

 

FTSE rises ahead of Easter weekend, JD Sport gains on upbeat outlook -...

The FTSE 100 gained on the final morning of this shortened Easter trading week. Festive cheer was limited though, as Thames Water confirmed shareholders would not provide it with a £500 million rescue package, prompting speculation over the London supplier’s future. On a more positive...

35 minutes ago