RBS Shows Progress With First Profit in More Than a Year

  • Bank hopes to reach settlement on mortgage securities in 2017
  • CEO says this year should be the last for substantial losses

Royal Bank of Scotland Group Plc reported a quarterly profit for the first time in more than a year as Chief Executive Officer Ross McEwan stepped up the pace of cost-cutting.

Excluding conduct charges and restructuring costs, operating profit in the three months through March topped estimates as the company indicated it’s on track to lower operating expenses by at least 750 million pounds ($968 million) this year. Revenue at the lender’s NatWest Markets securities unit almost doubled, helping to boost the bottom line, the company said.

Ross McEwan

Photographer: Chris Ratcliffe/Bloomberg

McEwan is working to lower costs by cutting jobs and branches while trying to maintain revenue as he targets sustainable profit in 2018 and the resumption of dividends. The bank, which has suffered more than 58 billion pounds of losses since its taxpayer-funded bailout in 2008 and remains more than 70 percent-owned by the U.K. government, said 2017 should be its final year of significant one-time legacy costs.

“Underneath, the core business is doing very well,” said Gary Greenwood, an analyst at Shore Capital with a hold rating on the shares. “It can be a bit dangerous to look at the underlying performance as it ignores restructuring costs. They expect a loss for the full year, but they’re showing if they tidy it up you’re at least left with something that looks OK.”

Profit Swing

Net income was 259 million pounds, compared with a loss of 968 million pounds a year ago, driven by lower charges for misconduct, according to a statement on Friday. The CEO is pushing to lower operating expenses by 2 billion pounds over the next four years as he seeks to reach a cost-to-income ratio, a measure of profitability, of below 50 percent by 2020.

The shares rose 2.2 percent to 258.9 pence at 9:34 a.m. in London trading, bringing its gain this year to about 15 percent. U.K. Chancellor of the Exchequer Philip Hammond signaled last week he doesn’t expect to sell the taxpayer’s stake at a profit, which is calculated in the government’s accounts at anything above 407 pence a share.

The bank cut 278 million pounds of operating expenses in the first quarter, about 37 percent of its annual target, while net interest income from lending rose to 2.23 billion pounds, compared with 2.16 billion pounds a year ago. RBS’s net interest margin widened to 2.24 percent from 2.15 percent.

“These results show a path to profitability as we put the past behind us,” McEwan said on a call with reporters. “By going further on cost reduction and faster on digital transformation, we will deliver a simpler, safer and even more customer-focused bank, with a compelling investment case.”

Operating profit at the core business, excluding one-time costs, was 1.3 billion pounds, surpassing estimates. While revenue improved at every key division, the biggest increase came at the NatWest Markets unit where it leapt 83 percent to 508 million pounds, reflecting improved trading for interest rate derivatives versus a poor quarter a year ago. The bank expects a weaker second quarter for the investment bank.

“RBS’s markets revenue results are likely to be the envy of Barclays,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London. The quarterly profit was driven by a “very strong investment bank result which combined with a better cost performance and margin improvement.”

Read more about Barclays’s surprise drop in trading revenue

Mortgage Probe

While McEwan is making progress at the bank, the lender faces two major obstacles to a full recovery outside of its control: A looming U.S. penalty for the sale of retail mortgage-backed securities and settling European Union antitrust concerns linked to its bailout during the financial crisis after failing to sell its Williams & Glyn unit.

The bank still hasn’t entered substantive talks over mortgage securities with the U.S. Department of Justice following a change of leadership under President Donald Trump, McEwan said on a call with reporters. He warned that final costs could be higher than provisions, but said he hopes for a settlement this year, clearing the way for the bank to make an annual profit in 2018.

Although the CEO attempted to draw a line under Williams & Glyn and the mortgage probe by taking a 4.1 billion-pound charge in the fourth quarter, bringing provisions on the bank’s balance sheet to protect against regulatory and legal costs to more than 12 billion pounds, the final outcome of both issues remain uncertain. RBS took a 54 million-pound charge in the first quarter for conduct issues.

The firm’s core Tier 1 capital ratio, a measure of financial strength, rose to 14.1 percent from 13.4 percent at the end of December. The bank has previously said it plans to have a ratio of at least 13 percent at the end of this year, while working to cut 20 billion pounds of risk-weighted assets from its core businesses by the end of 2018 to boost capital.

McEwan has previously pledged to return excess capital above the 13 percent ratio to investors through dividends or share buybacks. Before it can do so, the bank has said it must settle its U.S. mortgage probe, get a deal from the EU on Williams & Glyn, pass stress tests set by the Bank of England and report an annual profit.

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