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Royal Bank of Scotland swings to third-quarter loss after another big £900mln PPI provision

For the three months to end-September, the lender reported a pre-tax operating loss of £8mln, compared to a £961mln profit in Q3 last year

Royal Bank of Scotland sign
RBS also flagged up a “particularly challenging” period for its investment banking arm, Nat West Market

Royal Bank of Scotland Group PLC (LON:RBS) shares fell on Thursday as the lender swung to a loss in its third-quarter after making another big £900mln provision to settle payment protection insurance (PPI) mis-selling claims.

In early morning trade, RBS shares were 2.7% lower at 227.4p.

For the three months to end-September, the majority taxpayer-owned lender reported a pre-tax operating loss of £8mln, compared to a £961mln profit in the same period last year.

READ: PPI still lingers over Britain’s banks ahead of Q3 results period

The £900mln charge set aside to compensate customers who were mis-sold PPI impacted the bank’s core capital ratio by 50 basis points to 15.7%.

The FTSE 100-listed company also flagged up a “particularly challenging” period for its investment banking arm, Nat West Markets, which posted a loss of £193mln for the quarter.

The unit’s total income dropped to £150mln, down from £569mln in the third quarter last year, with a depressed bond market hitting income.

RBS’s bank’s net interest margin fell to 1.97%, down from 2.02% in the previous quarter.

The bank’s gross new mortgage lending, however, rose to £8.6bn in Q3 2019, compared with £6.7bn in Q2 2019, while commercial banking net lending was £0.1bn higher than Q2 2019.

RBS said it retained the outlook it provided with its 2019 interim results.

The third quarter  PPI provision was at the higher end of a £600mln-£900mln forecast issued by RBS in September, with lenders hit by a late surge in PPI queries ahead of the August 29 deadline for claims.

The latest results come ahead of Alison Rose taking over as the bank’s CEO on November 1.

Rose, who will become the first woman to lead one of Britain’s big four banks, is expected to outline her new strategy in February.

Some positive signs

Nicholas Hyett, equity analyst at Hargreaves Lansdown commented: “PPI has checked out with a bang, driving RBS back into the red in the third quarter - the industry will be relieved to see the back of the whole sorry saga.

“However, it’s not the main culprit in today’s profit miss. RBS’ investment bank, NatWest Markets, delivered a very disappointing result – with core income almost halving in a tougher rates environment.

He added: “Looking past the headline numbers though we see some positive signs. Lending growth continues across the retail and commercial banks and bad loans remain low by historic standards. While the difference between what the bank can earn on loans and has to pay on deposits remains under pressure, the interest margin is holding up reasonably well in our view.

“Perhaps more importantly, once you take PPI out of the picture, the bank continues to add to its already sizeable capital position. That underpins the sizeable dividend and also the bank’s ability to buy shares back off the UK government – a long term goal but one which the current political turmoil has probably pushed further into the future.”

However, Hyett concluded: “It’s important not to lose sight of what RBS is though. Banks are bellwethers for the economies they operate in and the outlook for the UK remains uncertain. If things take a turn for the worst demand for new loans will likely dry up and bad loans spike – leaving RBS in a very uncomfortable position.”

 -- Adds share price, analysts comment --

Quick facts: Royal Bank of Scotland

Price: 122.35 GBX

Market: LSE
Market Cap: £14.83 billion

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