RBS reports £392m Q3 profits but awaits large US fine

RBS has announced a third consecutive quarter of profits, with £392 million posted in the third quarter, but could post its tenth consecutive annual loss due to an impending US fine.

Related topics:  Finance News
Rozi Jones
27th October 2017
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"The fact the bank has said it expects to be profitable next year suggests RBS is bracing for a pretty imminent rap on the knuckles."

Its Q3 results take total profits so far this year to £1,331 million.

However in its interim results, the Bank said it expects to "be profitable in 2018", suggesting that it is expecting a fine from the US Department of Justice to hit in the fourth quarter of this year.

The fine relates to the mis-selling of mortgage-backed securities before the financial crisis. RBS has already paid out £4.2 billion to the US Federal Housing Finance Agency this year to settle outstanding litigation against the bank.

Chief executive Ross McEwan said: "Our strategy to deliver a simpler, safer, customer-focused bank, is working. We have grown income, reduced costs, made better use of our capital and continued to make progress on our legacy conduct issues.

"Our core bank continues to generate strong profits and we remain on track to hit our financial targets."

Laith Khalaf, Senior Analyst at Hargreaves Lansdown, commented: "RBS faces the indignity of suffering a tenth year without a profit, though this really all depends on the timing and size of the fine that’s coming from the US Department of Justice. The fact the bank has said it expects to be profitable next year suggests RBS is bracing for a pretty imminent rap on the knuckles. The large and unpredictable nature of this liability looms large over RBS, and could hamper its ability to pass the Bank of England’s 2017 stress test.

"The core retail bank within RBS is performing pretty well, with income rising and operating costs falling sharply. Litigation costs have also dropped back this year, and the bank has managed to put to bed some long standing legacy issues. Indeed we now wave goodbye to both Williams & Glyn and the Capital Resolution division, drawing a close to two unseemly chapters in the bank’s history.

"Looking forward, RBS stands to be a key beneficiary of interest rate rises in the UK, if the central bank actually follows through on its recent hawkish rhetoric. Furthermore, once the quantum of the fine from the US Department of Justice is known, this removes a major barrier for investors who might be considering buying the stock.

"However one large obstacle will still remain, and that’s the government’s 71% stake in RBS. The presence of such a large seller will put downward pressure on the share price, irrespective of the bank’s results. Currently the market has no visibility on the government’s plans for disposing of its stake. There is considerable upside in the stock before the taxpayer breaks even on the bailout, which would require the share price to almost double, but a sale of shares at a loss has been mooted by the Chancellor. This would pave the way for a more immediate start to the government selling off its remaining stake.

"We may get more details on the Chancellor’s plans for RBS in the forthcoming Budget, but with political capital quite thin on the ground at the moment, this battle might be left for another day."

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