RBS falls back into the red

RBS, which is 83 per cent owned by the taxpayer, said the loss came largely after an 825m hit in relation to its use of the Government's toxic asset protection scheme.

Underlying figures showed earnings of 726m in the three months to September 30, up from 250m in the third quarter as it continued to benefit from lower bad debts.

The NatWest parent had returned to profit in the first half of the year, but chief executive Stephen Hester said its figures were impacted by highly volatile accounting charges, which can "obscure our underlying story".

Trends at the bank mirrored those reported by fellow taxpayer-backed rival Lloyds Banking Group earlier in the week, with bad debts down and better profit margins in its retail banking arm.

Losses on loans turned sour were down 40 per cent year-on-year and 21 per cent lower since the second quarter, according to RBS.

Its retail arm saw operating profits rise 12 per cent to 1.1bn, partly boosted by higher margins on mortgage business as borrowers came off cheap deals on to its standard variable rate.

But RBS said while gross mortgage lending remained strong, up eight per cent on the previous three months, figures on a net basis were hit as more customers redeemed home loans.

It lent another 7.6bn to small businesses, but said demand for credit was weak.

The bank's lending to large and small businesses has reached 30.9bn since March and RBS confirmed it was on track to meet the Government-set target for 50bn gross lending in the year to March 2011.

The bank's investment banking business had a tougher quarter, with more difficult conditions leaving revenues in Global Banking and Markets (GBM) down by a fifth.

But in a move likely to stoke further anger over pay and bonuses within state-backed players, RBS revealed it increased its compensation ratio - staff costs as a percentage of revenues - in the GBM division to 40 per cent in the third quarter.

This was higher than the 32 per cent in the previous quarter and the 35 per cent a year earlier.