RBS Gains Profit Traction as It Works to Settle U.S. Probe

(Bloomberg) -- Royal Bank of Scotland Group Plc forged ahead in the first quarter, cutting costs to the lowest in at least five years, indicating the lender is well-positioned to restore dividends once it settles a U.S. misconduct probe.

Pretax profit was almost twice analysts’ estimate, largely because the Edinburgh-based bank posted a rare quarter without misconduct charges. Loan impairments also remained modest, while sharp cuts to the bank’s branch network have started to pay off, according to a statement Friday.

RBS Gains Profit Traction as It Works to Settle U.S. Probe

“This is a good set of results, showing the progress we are making despite a more competitive market,” Chief Executive Officer Ross McEwan, 60, said in the statement. “Our income is up, costs are down and our capital has strengthened again.”

RBS swung to its first full-year profit in a decade in 2017, but its outlook is still clouded by the delayed settlement over the Department of Justice investigation into toxic mortgage bonds the firm sold before the financial crisis. RBS will probably have to pay about $9 billion to resolve the matter, according to analysts at Deutsche Bank AG.

Steady Guidance

The bank left its earnings guidance unchanged. Pretax profit surged to 1.2 billion pounds ($1.7 billion), compared with the 699 million pounds expected by analysts. Income rose 2.8 percent to 3.3 billion pounds, while operating expenses fell by 442 million pounds to 2 billion pounds, the lowest in McEwan’s four-and-a-half year tenure at RBS.

The shares slipped 0.4 percent to 271.4 pence at 8:25 a.m. in London. McEwan, who has told investors he’s hoping to reach an agreement this year, offered no new guidance on when the bank may be able to put the U.S. probe behind it.

“We’d like that resolved, but at a reasonable pricing,” the CEO said in a call with reporters. “I’ve got the timing wrong, as I thought it would have been last year. We hope it happens sooner rather than later.”

Unlike Barclays Plc, the lender didn’t surprise the market with an additional charge for the payment protection insurance scandal. On Thursday, Barclays set aside another 400 million pounds to compensate customers for selling customers insurance they didn’t need.

The lender’s common equity tier 1 ratio, the key measure of its ability to withstand another banking crisis, rose to 16.4 percent, far greater than its required regulatory minimum. However, none of that excess capital can be returned to shareholders -- and the British government cannot sell down its 70 percent stake in RBS -- until it pays the U.S. DOJ fine.

Markets Restructuring

McEwan also said that the lender is undergoing a “major restructuring” at its trading unit, NatWest Markets, which will have significant cost reductions by the end of next year. That division booked slightly higher revenue from the same period a year earlier.

The CEO also indicated that some of the bank’s 275 Williams & Glyn branches may be cut. The lender has forecast 2.5 billion pounds of restructuring costs over the next two years, partially linked to the increased use of artificial intelligence and technology. In March, RBS made its first acquisition since the doomed ABN Amro deal that led to its bailout, spending about 53 million pounds on a cloud-software firm.

“The outlook continues to be overshadowed by the impending U.S. RMBS settlement with the DOJ, for which the timescale is out of the group’s control,” said Gary Greenwood, an analyst at Shore Capital.

©2018 Bloomberg L.P.