RBS reported an operating profit for Q2 of £1.2bn compared to a £695m loss in the same quarter of 2016. The improved performance reflects a 24% rise in income and 32% fall in operating costs versus the prior year.
The shares rose 3.6% in early trading.
RBS is making real progress. Costs are coming down, and loans to customers continue to grow. Record low interest rates and a competitive mortgage environment are hampering 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 the first half, 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.
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.
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 should draw a line under the whole sorry saga, but will still cost the bank around £800m.
With those challenges ahead, investors should heed management's warning that "the timing of dividends or buybacks remains uncertain."
Half Year Results
The strong second quarter performance was largely driven by a significant decline in operating expenses, thanks to a fall in litigation and conduct costs from £1.3bn in Q2 last year to £342m this year, as well as a substantial decline in losses from Capital Resolution, RBS' 'bad bank'.
Income across the group's core business remained broadly flat. RBS' three core businesses, Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets, saw overall adjusted operating profits rise 2% to £1.35bn in Q2. Half year profits rose 29% to £2.7bn, reflecting the dramatic improvement in Q1.
The bank's net interest margin, the difference between the price it pays to borrow funds and the interest it charges when lending, has fallen 0.11 percentage points compared to Q1 and now stands at 2.13%.The bank's cost to income ratio saw a dramatic improvement, from 66.6% last year to 50.7% in Q2.
Total risk-weighted assets held in the bad bank fell £7.9bn to £26.6bn, and are now within the group's target range for the end of the year. Following the $5.5bn settlement with Federal Housing Finance Agency, the group has $3.75bn of outstanding provisions relating to US RMBS litigation.
RBS's CET1 ratio of 14.8%, a key regulatory measure of banking capitalisation, improved by 1.4 percentage points compared to year end.
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