RBS has reported a positive first quarter operating profit for the first time since 2015, with a strong performance from the group's core divisions. The shares rose 3% on the news.
'Exceptional' impairment and restructuring costs may be far from exceptional at the moment, but underneath its cratered surface, RBS is putting in a reasonable performance. Quarterly profits from the core divisions, namely Personal & Business Banking, Commercial & Private Banking and NatWest Markets (NWM), are again around the £1bn mark.
Costs are coming down, and loans to customers continue to grow. Record low interest rates could well hamper net interest margins (the difference between what the bank pays out on deposits and charges on loans), but this also means bad debts shouldn't escalate.
Stripping the bank back to those core businesses has proven time consuming and expensive, but the end is finally in sight, with the troublesome Capital Resolution division 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 solvency.
Nonetheless, 2016 was RBS' 9th consecutive year of losses and, despite a better performance in Q1, there are enough dark clouds still hanging around for RBS to say it's expecting 2017 to be the 10th. The bank's historic misdemeanours continue to cause problems.
The bank is facing a steady flow of fines and compensation claims for mis-selling scandals dating 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.
The other monkey on RBS' back has been Williams & Glyn. 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. This will hopefully draw a line under the whole sorry saga, but will still cost the bank around £750m.
With these challenges in mind, it's no surprise to see the bank wrap up its medium term guidance with the warning that "the timing of dividends or buybacks remains uncertain."
First Quarter trading update
Q1 operating profit was £713m, up from £421m last year, as impairments fell by £177m to £46m and the investment banking division, Natwest Markets, improved from a £20m loss to a £68m profit. Taken together, the core divisions contributed £921m to profits. The Capital Resolution 'bad bank' recorded a £175m loss in the quarter.
Net interest income increased slightly in Q1 to £2.2bn, with net interest margin ticking up 0.09 percentage points on last year to 2.24%.
Costs are coming out of RBS. Excluding a £51m VAT recovery, adjusted operating expenses have reduced by £278m, down 12.9% year-on-year. RBS says it is on target to achieve a £750m reduction for the full year. The adjusted cost:income ratio for the first quarter was 55.8% (Q116: 76.1%).
Risk-weighted assets (RWAs) have fallen £6.5bn over the quarter, with £4bn of disposals in Capital Resolution. Along with the improvement in profits, this helped the group's capital position (as represented by Common Equity Tier 1, or CET1) improve 0.7 percentage points to 14.1%.
RBS remains committed to maintaining a CET1 ratio of 13% and reducing RWAs by around £20bn this year, as the wind-down of the Capital Resolution division continues.
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