Royal Bank of Scotland Group PLC (LON:RBS) saw its shares rise today after it reported its third consecutive quarter of profit as restructuring and misconduct costs fell but total income dropped, reflecting margin pressures in mortgage lending.
The FTSE 100-listed lender posted attributable profit in the third quarter to 30 September of £392mln, down from £680mln in the second quarter but up from a £469mln loss in the same period a year earlier.
READ: FCA pressed to publish full RBS report after 'whitewash' clams
Operating expenses were cut to £2.1bn from £2.9bn last year after reducing restructuring, litigation and misconduct costs.
Investors reacted positively to the results, with its shares adding nearly 2%, or 5.5p at 286.50p in late afternoon trading.
RBS bracing for hefty US fine
However, RBS warned that it faces rising misconduct costs and provisions in relation to the mis-selling of mortgage-backed securities in the US in the lead up to the 2008 financial crisis. It is currently awaiting a fine by the US Department of Justice (DoJ), which is expected to come in at about £6bn.
"RBS faces the indignity of suffering a tenth year without a profit, though this really all depends on the timing and size of the fine that’s coming from the US Department of Justice," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"The fact the bank has said it expects to be profitable next year suggests RBS is bracing for a pretty imminent rap on the knuckles."
READ: RBS maintains potential bill for claims against small business unit at £400mln after FCA dismisses misconduct allegations
In July RBS agreed to pay US$5.5bn to the US Federal Housing Finance Agency to settle the second of three investigations into the mortgage-backed bonds scandal.
On Thursday, RBS said it would pay US$44mln to the DoJ to settle a separate criminal investigation that accused its traders of lying to clients about bond prices, charging commissions it did not earn and concealing the fraud in an effort to increase profit between 2008 to 2013.
Meanwhile, the bank is still yet to put its LIBOR and foreign exchange mis-selling scandals to bed with lawsuits ongoing.
The Financial Conduct Authority also published an interim report into the way RBS treated struggling small business customers under the lender’s Global Restructuring Group (GRG) division. The regulator said it might take “further action” against the bank for mistreating the customers.
In the third quarter, litigation and conduct costs came to £123mln, compared to £425mln last year, thanks in part to the absence of further provision for the mis-selling of payment protection insurance.
During the period, the group reduced its risk weighted assets to £210.6bn from £228.2bn last year.
Restructuring progress
RBS, which is still more than 70% owned by the government following its bailout in 2008, said restructuring costs totalled £244mln, down from £469mln a year ago.
"Our strategy to deliver a simpler, safer, customer-focused bank is working," said RBS chief executive Ross McEwan.
"We have grown income, reduced costs, made better use of our capital and continued to make progress on our legacy conduct issues."
The cost to income ratio was 67.5%, compared to 87.8% last year and 64.4% in the second quarter.
However, taking into account the uncertainty it faces with legacy issues and the economic outlook, RBS improved its capital position. The common tier equity 1 ratio, a measure of capital, rose by 70 basis points to 15.5%, well ahead of its benchmark target of 13%.
"This provides a substantial buffer to absorb further potential litigation and conduct redress costs, notably in respect of the group’s dispute with the US Department of Justice in respect of historical US RMBS mis-selling, which remains ongoing," said Shore Capital analyst Gary Greenwood.
Net income falls on margin pressures
While lower costs supported profits, net income fell to £3.2bn from £3.3bn as net interest margins (NIM) declined to 2.12% from 2.17%. RBS said the drop in NIM was a result of increased liquidity requirements and asset margin pressure associated with mortgage lending.
Record-low interest rates in the UK have boosted demand for mortgages but have put a squeeze on banks’ profits.
But the Bank of England is expected to raise interest rates next week and RBS will be a key beneficiary.
Another potential upside for RBS is the approval from the European Union to set up a fund for challenger banks to boost competition. The fund is an alternative plan to having to sell its William & Glyn branches as part of its bailout requirements. The bank will no longer have to report Williams & Glyn as a separate bank.
Marking an additional milestone in its road to recovery, RBS will later this year close its Capital Resolution division, which has sold off its large stockpile of unwanted assets.
RBS to meet 2017 targets
RBS said it remains on track to reach its 2017 financial targets to grow income, cut costs, use less capital across core businesses and to make progress on resolving legacy issues.
The lender expects to reach target cost savings of £750mln for the 2017 fiscal year.
"As previously noted, there remains a question mark over how sustainable it is to continue in this fashion," said Neil Wilson of ETX Capital.
"RBS has cut costs at roughly £1bn a year for the last three years, whilst shedding a third of posts since 2013. Cutting out the fat and around the margins is fine but eating into the core business is a risk but one that is working for now. A chronic lack of profits in the last nine years has hurt RBS’s ability to invest in new platforms and IT."
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