PART-nationalised Royal Bank of Scotland has boosted its chances of an earlier than expected return to private ownership, after posting a surprise £1bn second-quarter profit.
The Government has already started selling off shares in its state-backed rival Lloyds Banking Group, but RBS’s privatisation was considered by banking and political sources to be three to five years away despite the drastic cost-cutting, asset sales and the shrinking of its investment bank.
The Government pumped £45.5bn into the bank during the 2008/09 financial crisis, leaving the taxpayer with an 81 per cent stake. Taxpayers are still sitting on a paper loss of £11.7bn.
RBS’s second-quarter numbers far exceeded analysts’ expectations, prompting the bank to report a week early. It sent its shares soaring yesterday, although the price is still around 25 per cent below that paid by the state.
Before yesterday’s results, 25 analysts had a “hold”, “sell” or “strong sell” rating on the stock, with three rating it a “strong buy”.
Although some of those analysts may now alter their view on the bank, new chief executive Ross McEwan, who took over from Yorkshire-born Stephen Hester in October 2013, sounded a note of caution, pointing out that RBS is still dealing with significant problems from its past.
“This includes significant conduct and litigation issues that will hit our profits in the months and years to come,” Mr McEwan warned. “I’m pleased we’ve had two good quarters, but no-one should get ahead of themselves here – there are bumps in the road ahead of us.”
RBS, which was last year fined £390m for its part in manipulation of the Libor benchmark interest rate, is one of several banks being investigated over alleged manipulation of foreign-exchange markets. It also faces claims relating to the sale of mortgage-backed securities.
However, its prospects have been boosted by Britain’s economic upturn. Mr McEwan said the economic revival had helped the bank to recover debts it had previously written off.
The stronger results – despite RBS setting aside an additional £250m to compensate customers for mis-selling payment protection insurance and interest rate swaps – lifted the bank’s core capital ratio to 10.1 per cent at the end of June, up from 9.4 per cent three months earlier.
RBS is targeting a Tier 1 capital ratio of 11 per cent by the end of 2015, and at least 12 per cent by the end of 2016.
A proposed sale of its US business Citizens will boost capital further, but RBS said that the ongoing regulatory investigations and litigation are expected to drag on capital generation over the coming quarters.
Mr McEwan said the results showed the steady progress being made to make RBS “a much simpler, smaller and fairer bank”.
“RBS is a fundamentally stronger bank that can deliver good results for customers and shareholders,” he said.
A HM Treasury spokesman said: “The latest set of results released by RBS this morning reflect the beginning of a real improvement in the firm’s performance as it embarks on its new direction of being a bank that’s focused on supporting Britain’s economy, families and businesses. However, as the Chancellor has said, RBS is still some way off from returning fully to the private sector. Any decisions on when to sell will be based on value for money for the taxpayer. We have no set timetable for disposals of these shares”.