RBS Operating Profit Drops 22% as Markets Revenue Slumps

Royal Bank of Scotland Group Plc, Britain’s biggest taxpayer-owned lender, said profit fell 22 percent in the second quarter as revenue from its markets unit slipped amid the worsening European sovereign debt crisis.

Operating profit fell to 650 million pounds ($1 billion) from 833 million pounds in the year-earlier period, RBS said in a statement today. That was in line with the 649 million-pound median estimate of nine analysts surveyed by Bloomberg. Revenue at the markets unit, which includes debt capital markets and foreign exchange, fell 9 percent to 1.07 billion pounds.

“Economic and market conditions remain uncertain and therefore client activity is modest,” Chief Executive Officer Stephen Hester, 51, told reporters on a conference call today. “This will continue to be a difficult time.”

Hester has cut assets by more than 800 billion pounds, eliminated 36,000 jobs and scaled back RBS’s securities and Irish units since he took over from Fred Goodwin when the bank was rescued in 2008. That restructuring, which Hester has likened to defusing “the biggest time bomb in history,” may now be overshadowed by the regulatory probe into allegations that banks manipulated the London interbank offered rate.

The shares rose 5.6 percent to 216 pence in London trading, for a market value of about 24.4 billion pounds. RBS has increased 7 percent this year after sinking 48 percent in 2011. The taxpayer owns 82 percent of the lender.

Low Expectations

“Expectations for RBS are generally pretty low and they didn’t disappoint,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, who rates the stock a hold. “With RBS it’s all about the health of the balance sheet and they’re making excellent progress in those terms.”

RBS’s loan-to-deposit ratio fell 10 percentage points to 104 percent at the end of June, meaning the bank lent 104 pounds for every 100 pounds it took in deposits. The lender plans to reduce the ratio to 100 percent from a high of 154 percent in 2008. The Edinburgh-based company also reduced its reliance on short-term wholesale funding by 40 billion pounds this year to 62 billion pounds by the end of the quarter.

RBS has dismissed four employees for trying to influence the individual responsible for Libor submissions following an internal investigation, Finance Director Bruce Van Saun said in a Bloomberg Television interview today. He said it was too early to give an estimate for the potential costs RBS faces for its involvement in the scandal.

‘Reputational Issue’

“This is a really important reputational issue for the industry,” Hester said. “It’s one that we must all take with all seriousness.”

The bank may be fined 420 million pounds by regulators and have to pay 680 million pounds more to settle civil lawsuits following the probe, Morgan Stanley analyst Betsy Graseck said in a July 12 report.

Barclays Plc was fined a record 290 million pounds in June when it became the first bank to reach a settlement with regulators. The fine, coupled with criticism from regulators, forced the departure of the London-based lender’s chairman, CEO and chief operating officer.

RBS made a provision of 125 million pounds to cover costs linked to a computer failure at its consumer bank in June that left most of its 15 million account holders unable to access their accounts for days. Adding provisions for the mis-selling of interest rate swaps and payment-protection insurance, the bank set aside a total of 310 million pounds for redress.

Markets Unit

RBS said in January it would cut about 3,500 jobs at the investment-banking division, run by John Hourican, and sell or close the unprofitable cash equities, mergers advisory and equity capital markets divisions. Hester decided to dispose of the units after volatile markets and increasing regulation made it harder to generate returns that beat the cost of equity.

Revenue at the remaining markets unit fell to 1.07 billion pounds from about 1.17 billion pounds in the year-earlier period, hit by a decline in trading as lawmakers failed to find a solution to the European sovereign debt crisis. Income beat the 932 million-pound estimate of Shailesh Raikundlia, a London- based analyst at Espirito Santo Investment Bank. Operating profit dropped 23 percent to 251 million pounds and was down 70 percent on the first quarter.

Revenue and margins at the consumer unit are being squeezed as the U.K. economy contracted for a third quarter and the Bank of England holds its benchmark interest rate at a record low. Operating profit at the unit fell 18 percent to 437 million pounds in the three months to June. The unit’s net interest margin, the difference between what it earns on loans and its cost of funding, fell to 3.57 percent by the end of the first half from 4.04 percent.

‘Feeling the Pinch’

“The tough economic conditions mean our customers are feeling the pinch,” Hester said on the call. “While that is so, they will be doing less with their banks and less with us.”

Operating profit from its insurance unit, Direct Line Insurance Group Plc, rose 6 percent in the first half to 219 million pounds from the year-earlier period. Preparations for the initial public offering of the unit in October “remain on track,” the bank said. The sale will be done in three stages, Van Saun said on the call with journalists.

Hester said today the bank will retain Citizens Financial Group Inc., the U.S. consumer and commercial lender RBS bought in 1988, because it’s a “core” part of the bank. Canada’s Toronto-Dominion Bank (TD) held informal talks to buy Citizens two or three months ago, the New York Post reported today, without saying where it got the information.

Nationalization Opposed

RBS’s net loss narrowed to 466 million pounds in the quarter from 897 million pounds in the year-earlier period. Operating costs were little-changed at 3.88 billion pounds.

The U.K. rescued RBS at the height of the financial crisis, injecting 45.5 billion pounds of money into the lender, making it the costliest bailout of any bank.

Senior ministers are discussing buying out the part of RBS the government doesn’t already own to boost the flow of credit to small companies, the Financial Times reported yesterday, citing unidentified government advisers.

“Any move to fully nationalize RBS would face stiff opposition from taxpayers given that the value of the investment in the bank has fallen by more than half,” Raikundlia wrote in a report to clients yesterday. “There could potentially be a large management exodus leaving a huge challenge for the government to manage a bank with 1 trillion pounds of assets.”

The Treasury is opposed to any such plan and U.K. Financial Investments Ltd., the body that oversees the taxpayer’s stake, said in its annual report last month the government is committed to returning RBS to private ownership at the earliest appropriate opportunity.

“There’s probably, in the end, better ways to facilitate lending on the part of all banks in the U.K. than to nationalize RBS,” Van Saun said.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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