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LONDON (Alliance News) - Royal Bank of Scotland Group PLC Friday reported a swing to third-quarter pretax profit, but results included hundreds of millions of pounds of litigation and conduct costs, relating to matters such as regulators' probe into the foreign exchange markets and a further charge taken for the payment protection insurance scandal.
In a statement, RBS, which is 80%-owned by the UK government, said it made a GBP1.27 billion pretax profit in the quarter ended September 30, compared with a GBP634 million pretax loss in the corresponding quarter last year.
The quarterly performance was supported by net impairment provision releases of GBP801 million, primarily in Ulster Bank and in RBS Capital Resolution, the 'bad bank' it set up to run down capital intensive assets, as RBS benefits from improving economic conditions in the UK and Ireland.
"UK and Ireland are showing signs of growth, and impairment trends are significantly better than we had anticipated at the start of the year," Chief Executive Ross McEwan said in a statement.
However, revenue fell to GBP4.36 billion from GBP4.89 billion, as a rise in net interest income, the difference between what RBS receives in interest on loans and the interest it pays out to savers, was more than offset by a drop in non-interest income.
The quarterly performance was achieved despite the bank setting aside GBP780 million relating to litigation and conduct costs, including GBP400 million for regulators' investigations into alleged manipulation in the foreign exchange market and a further GBP100 million for PPI due to higher-than-expected "reactive" complaint volumes. The PPI mis-selling scandal has now cost RBS more than GBP3.3 billion.
The provisions followed a similar move by rival lender Barclays PLC, which on Thursday made a further GBP170 million provision for PPI and set aside GBP500 million for the foreign exchange probe. On Tuesday, Lloyds Banking Group PLC set aside a further GBP900 million to cover PPI expectations.
McEwan also said RBS is on track to meet its capital targets, with the bank's common equity tier 1 ratio improving by 220 basis points since the year end and 70 basis points in the quarter to 10.8%. RBS is working towards a common equity tier 1 ratio minimum of 12%. In a conference call with journalists, McEwan said RBS is focused on further strengthening its capital position.
"We shouldn't be thinking about dividends until we've got a really good capital build and got some of the bumps in the road out of the way," McEwan said.
RBS's leverage ratio, a simple unweighted ratio of a bank?s equity to a measure of its total un-risk-weighted exposure, designed to guard against weaknesses in banks' ability to model risk, increased to 3.9% from 3.7% over the course of the quarter. The bank has a medium term target of attaining a leverage ratio of between 3.5% and 4.0%, while wanting to maintain a ratio of at least 4.0% in the long-term.
The UK banking sector is awaiting proposals over the leverage ratio at 1400 GMT, when the UK Financial Policy Committee?s review of the leverage ratio will be released. Although the Basel Committee on Banking Supervision has set a provisional leverage ratio of 3%, UK banks could face stricter rules.
"In February I placed trust at the heart of my new strategy for our bank. We have taken the first steps towards that goal, with early progress in making RBS simpler, clearer and fairer," Chief Executive McEwan said in a statement.
RBS also confirmed it will retain control of Ulster Bank, following a strategic review.
"We have confirmed today that Ulster Bank remains a core part of our bank. We have a good market position and believe that, with investment, Ulster Bank can deliver attractive shareholder returns in the future," McEwan said.
However, he also noted the banking group's "long list of conduct and litigation issues" to deal with, adding that RBS has "much, much more to do" to restore our customers' trust.
Those issues include an ongoing investigation being undertaken by UK regulators into an IT crash in 2012 that resulted in considerable delays to customer accounts and payments.
RBS also confirmed it has appointed external headhunters as it seeks a replacement for Chairman Philip Hampton, who will leave the bank during 2015 in order to join GlaxoSmithKline PLC.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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