Total income fell 5% in the third quarter to £3.2bn. However this was offset by a significant fall in operating expenses resulting in the bank reporting profit before tax of the quarter of £871m, its third successive quarter in the black.
The shares rose 2.4% following the announcement.
RBS is making real progress.
Stripping the bank back to a few core businesses has proven time consuming and expensive. But the end is finally in sight, with the troublesome Capital Resolution 'bad bank' due to be wound up by the end of the year. This should free up reserves and bolster the CET1 ratio, a core measure of a bank's capitalisation.
Costs are coming down, and loans to customers continue to grow. Record low interest rates and a competitive mortgage market are hampering net interest margins (the difference between what the bank pays out on deposits and charges on loans), but also means bad debts have stayed low.
Nonetheless, 2016 was RBS' 9th consecutive year of losses and, despite a better performance so far, there are enough dark clouds about for RBS to say it's expecting 2017 to be the 10th.
The bank's historic misdemeanours continue to cause problems. It's facing a steady flow of fines and compensation claims for mis-selling scandals dating back to before the financial crisis. PPI charges are finally receding, but US residential mortgage backed security (RMBS) mis-selling has taken its place. Exactly how big the final bill will be remains to be seen.
Williams & Glyn has been the other monkey on RBS' back. The bank was ordered to split W&G out as part of the settlement made with the EU when the bank was rescued. After several false starts, with RBS trying to float the business and sell it to rivals, regulators have finally accepted that a separation is impractical. RBS can now keep the business, but must instead pay money to competitors to help them gain market share. It draws a line under the whole sorry saga, with W&G being folded back into the rest of the bank by end of the year. It's still costing around £800m though.
Getting RBS back on the right path is a marathon task. The bank has run the first half surprisingly well, but there's still no guarantee it won't 'hit the wall'. As the group said at the half year stage, "the timing of dividends or buybacks remains uncertain."
Third Quarter Update
RBS has increased interest earning assets by 8% compared to a year ago, supporting a 6% increase in net interest income despite a slight deterioration in Net Interest Margin, the difference between the price the bank pays to borrow money and the rate it charges on loans, which fell to 2.12%. Net interest income now stands at £2.3bn.
However, other non-interest income fell by 25% to £858m, largely as a result losses in the Capital Resolution bad bank.
Capital Resolution has now shrunk to the point where it will no longer be reported separately, with Risk Weighted Assets (RWAs) down a further £3.5bn this quarter to £23.1bn. Williams & Glynn will also no longer be reported separately.
The bank has made significant progress in reducing costs, with a cost:income ratio of 67.5% this quarter compared to 87.8% 12 months ago. Total operating expenses are 26% lower, reflecting lower litigation and conduct costs as well as reduced restructuring costs.
RBS has strengthened its capital position. The CET1 ratio (a key measure of banking capitalisation) increased 0.7 percentage points from Q2 to 15.5%. This reflects continued RWA reduction and this quarter's profits, broadly offsetting the Capital Resolution losses taken in the quarter.
The bank expects to return to profit in 2018.
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