Royal Bank of Scotland is erasing £800m of bad debt provisions because of a dramatic improvement in its Irish operations and other troublesome areas of its business.
The surprise announcement from the 81% taxpayer-owned bank bolstered its shares, even as its chief executive warned that upcoming “conduct and litigation matters” could yet dent profits.
It is one of six banks involved in talks with the Financial Conduct Authority over alleged rigging in currency markets and Ross McEwan, marking a year as RBS boss, also pointed to a string of other risks in a third quarter trading update. These included possible further provisions for payment protection insurance mis-selling, misselling interest swaps to small businesses and the sale of mortgage bonds in the run-up to the financial crisis.
Indicating that he expected these to take 18 months to emerge, McEwan said the prospect of a first dividend by the bank - the first since the 2008 financial crisis - would not be possible before then. “We need to get ourselves through those (issues) before we see ourselves paying a sustainable dividend,” said McEwan.
“I have mentally in my mind a timeline of about 18 months and then I think you see a much cleaner business come out the back end of that,” McEwan. The bank also warned it was not generating as much revenue as it expected from its corporate and institutional banking arm, the new name for its slimmed down investment banking operations.
However, the City focused on the improvement in the fortunes of its Irish business, Ulster bank, and its new mini bad bank which led to a 1.8% rise in the shares to 368p.
Bad lending on home loans and commercial property by Ulster Bank has forced the bank to take more than £17bn of provisions since the taxpayer poured £45bn into RBS to prevent it from collapsing in 2008 and 2009.
But around £300m of provisions are being released in the third quarter, with more possible in the future if conditions keep improving. McEwan said the 23% rise in house prices in Dublin this year - a market which accounts for 45% of the Ulster unit’s business - was one of the factors helping the situation.
The mini-bad bank inside RBS, known as RBS Capital Resolution (RCR), was also able to release provisions of £500m and could do so again. The arm, responsible for selling off businesses that RBS does not want, had already written back some provisions in the first half and might also be able to accelerate its disposals. “Setting up RCR was one of the best things we did,” McEwan said.
The bank said it expected to “significantly outperform its previous guidance of around £1bn total impairments for full-year 2014”.
“Previously disclosed uncertainties remain, particularly relating to conduct and litigation matters,” the bank said.
In the third quarter of 2014, RBS said, there had been “continued improvement in economic conditions and asset prices in our key markets, including Ireland”.
“There has been an absence of large one-off impairments and lower levels of new non-performing loans in the rest of RBS’s business during Q3 2014,” it added.
The tone is different from the start of the financial year when RBS announced £8.2bn of losses - some £3.8bn of which was for settling litigation and regulatory problems and £4.5bn of bad loans - for 2013. In July, though, it released its half year numbers a week early, and reported £2.6bn of profits - the largest since its bailout.
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