RBS Seen Posting First-Quarter Profit as Bad Debts Fall

Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, may tomorrow post its first quarterly profit since 2011 as bad loans and the cost of redress for past missteps fell.

The firm will report net income of 356 million pounds ($554 million) in the first three months of 2013, according to the median estimate of five analysts in a Bloomberg survey. That compares with a loss of 1.5 billion pounds a year ago, and would be RBS’s first profit since the third quarter of 2011. Impairments may fall 22 percent to about 1 billion pounds, analysts said. RBS reports earnings at 7 a.m. local time.

“Everything is improving pretty steadily at RBS and we expect that to continue,” said Shailesh Raikundlia, an analyst at Espirito Santo Investment Bank in London with a sell rating on the shares. “We’re not expecting anything dramatic from them this quarter.”

Chief Executive Officer Stephen Hester, 52, said in February that the lender will this year complete the “most important” parts of its restructuring after receiving the biggest bank bailout in 2008 and 2009. Hester’s attempts to revive profit at the Edinburgh-based lender have been hampered by surging loan losses tied to the collapse of the Irish real estate market and the rising cost of compensating clients who were improperly sold payment-protection insurance.

Follow Barclays?

The firm is likely to follow Barclays Plc and Lloyds Banking Group Plc in not setting aside additional funds to compensate clients who were sold insurance that didn’t cover them or that they didn’t require, the analysts said. The 81 percent government-owned bank has already earmarked more than 2 billion pounds for PPI compensation, compared with 6.8 billion pounds for Lloyds and 2.6 billion pounds for Barclays.

RBS was down 0.9 percent to 304.3 pence by 10:03 a.m. in London, giving it a market value of about 34.1 billion pounds. The stock has fallen 6.3 percent this year, making it the worst performer among Britain’s five-largest banks in the period.

The Treasury is planning to start reducing its stake in RBS before the 2015 general election even if the shares trade below the average price the government paid for its holding, the Financial Times reported today, citing unidentified senior figures in Chancellor of the Exchequer George Osborne’s party.

The government has already reduced the price at which it says it would break even on its 45.5 billion-pound investment to 407 pence a share from the average of 502 pence paid during the rescue, people familiar with the matter said in March.

Shrink Bank

After pressure from regulators and the government to boost capital, RBS said in February it would shrink its investment bank and sell a 25 percent stake in Citizens Financial Group Inc., the U.S. consumer and commercial lender acquired in 1988.

Revenue from the markets business, its second-biggest unit after consumer and commercial-banking, will drop to 387 million pounds in the first quarter from 824 million pounds a year earlier, Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd. in London, wrote in a note to clients.

RBS last year announced plans to cut about 3,800 jobs at the investment bank, and sell or close its unprofitable cash equities, mergers advisory and equity-capital markets divisions.

Since Hester took over from CEO Fred Goodwin he has reduced the size of the firm’s so-called non-core business to 57.4 billion pounds at the end of 2012 from 258 billion pounds at the end of 2008, reduced costs and announced more than 36,000 job cuts.

The company probably cut a further 6 billion pounds off its non-core unit in the first quarter, Phin said.

‘Less Noise’

“What he absolutely has to do is deliver further cost reductions, a lot less noise from one-off items and be able to show core profitability,” said Simon Maughan, an analyst at Olivetree Securities Ltd. in London. ‘Expectations for RBS are pretty low, so they have the opportunity to deliver a positive surprise.’’

Operating costs have reduced by 2.7 billion pounds, or 16 percent since 2009 as the bank eliminated jobs, according to company filings.

Lloyds, Britain’s biggest mortgage lender, this week posted a near-threefold increase in first-quarter profit as impairments for souring loans dropped by more than analysts estimated.

Pretax profit at Lloyds rose to 1.48 billion pounds from 497 million pounds in the year-earlier period, beating analyst estimates. Provisions fell 40 percent to 1 billion pounds.