RBS losses deepen but stays on path to recovery

Royal Bank of Scotland reported steeper losses in the first three months of 2011, but cheered investors with the news that its Irish business should see some improvement this year.

RBS, which is 83 per cent owned by the taxpayer, reported a pre-tax loss of £116m in the first quarter to March.

This was up from an £8m loss in the previous quarter and a £5m loss in the same period last year.

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But chief executive Stephen Hester said the bank expects “continued progress” and “enduring gain” as it also revealed better-than-expected operating profits of £1.1bn, compared with £55m in the last quarter.

The bank’s Churchill and Direct Line insurance arm, which it is committed to selling, also returned to a profit.

The insurance arm, which has four core sites in Yorkshire – three in Leeds and one in Doncaster – made £67m in the quarter, compared with a loss of £9m in the previous three months.

Elsewhere, the bank warned the fallout from a court ruling on payment protection insurance claims could have a “material” impact, but refused to say exactly how much it would cost.

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The banking sector was rattled this week by Lloyds’ shock £3.2bn charge to cover compensation for people sold insurance they could never claim or did not know they were buying.

Lloyds made the provision for payment protection insurance (PPI) complaints after banks lost a UK court case on the way policies were sold to millions of customers.

The policies were typically taken out alongside a personal loan, mortgage or purchase to cover repayment if the borrower was unable to pay due to unemployment, sickness or accident.

RBS reported bad debts of £1.95bn, including a £1.3bn hit from Ulster Bank, which is exposed to Ireland’s struggling economy. Customers in Ireland are struggling to pay back loans against a backdrop of tough economic conditions.

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The total charge for bad debts fell nine per cent from the final quarter of 2010. RBS said Irish loan losses would stay high this quarter before gradually declining in the second half of the year.

The bank’s core business – namely its main retail and investment banking arms and excluding its insurance unit which is due to be sold off or floated on the stock market in 2012 – made an operating profit of about £2bn.

“RBS is pulling off the recovery that we have targeted,” said Mr Hester.

The group’s shares closed the day up 5.6 per cent, a rise of 2.3p to 42.4p.

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Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: “There are some signs that the recovery continues at RBS, even if numerous and significant hurdles remain.”

However, ClairInvest fund manager Ion-Marc Valahu said RBS remains a stock to avoid.

“There is nothing to write home about. RBS is still on life support from the Government,” he said.

Also hanging over RBS is an impending report by the Financial Services Authority (FSA) regulator into its near-failure, which required the Government to pump in £45bn.

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Publication of the report has been held up by legal complications.

On Thursday, Britain appointed two senior corporate governance experts to ensure that the FSA’s delayed report into RBS’s troubles during the crisis was neither a whitewash nor stymied by legal rows. Mr Hester said he remained uncertain over the timing of the FSA’s report, which is being examined by RBS’ lawyers, but added that the company remained keen for the report to be publish- ed.

“We think it would be a good thing if a report is published, as there’s a risk that people think there’s some smoking gun.

“If there is, we haven’t found it,” said Mr Hester.

The group also took a £469m charge from a market valuation of credit insurance provided to RBS by taxpayers under the Asset Protection Scheme (APS).

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But RBS saw income rise eight per cent quarter-on-quarter to £8bn, driven by a strong performance at its investment banking arm Global Banking and Markets (GBM).

Mr Hester, who was educated at Easingwold Comprehensive in North Yorkshire, said the bank’s recovery allowed it to absorb higher Irish bad debts and regulatory demands.

He said: “As we work through these items, the group’s regained strength and core profitability should be the enduring gain, becoming increasingly available to drive shareholder returns.”