RBS Up 3% On Modest Improvements

Published in Company Comment on 3 August 2012

… apparently, low expectations mean less chance for disappointment.

RBS (LSE: RBS) is the last of the big London banks to report, and after hearing apologies from Barclays (LSE: BARC) and HSBC (LSE: HSBA) for serious errors in judgment (to put it lightly), the bank's management were probably happy to only have to apologise for a computer failure rather than a failure in ethics. It's always easier when you can blame the machines.

The costs related to the computer system crash were also easier to stomach as the £125 million provision set aside for the incident was a modest amount compared to the reported £1.8 billion operating profit through the first half of the year.

If we ignore the £1.4 billion in operating losses from what RBS has classified as non-core assets (all £72 billion of them), operating profits from core operations were £3.2 billion, down 19% from a year ago despite lower insurance claims and loan impairment costs. Part of the problem comes from the investment banking operations -- which RBS calls its Markets division -- which are suffering because of the dreadful conditions in European financial markets. Fair enough, this will likely bounce back eventually.

The other drag was the UK retail banking segment which reported a 13% drop in operating profit as a result of an 11% drop in income. RBS, like Lloyds (LSE: LLOY), is trying to shrink its balance sheet by getting rid of some of its more troubled retail operations; the UK retail business is still at the heart of the business, so seeing this type of performance isn't reassuring.

Of course, neither are talks about fully nationalising the bank, which I think miss the point of what is plaguing the UK (and European) banking markets. But that is a topic for another article.

RBS's management faces significant challenges in re-establishing the bank's reputation -- and recent revelations about industry peers don't help -- and while declining loan impairments and rising capital levels show things are improving RBS has a long way to go. If I was daring enough to look for exposure to the financial sector, I think I'd look elsewhere.

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> Nate does not own any shares discussed above.

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Mari11ion 03 Aug 2012 , 11:22am

"...only have to apologise for a computer failure rather than a failure in ethics". What about its role in the Libor scandal?

TMFTheSnake 03 Aug 2012 , 12:40pm

It remains to be seen where RBS falls in this lovely mess, so I anticipate a more thorough apology will be forthcoming.

adcmelb 03 Aug 2012 , 11:11pm

Still believe that RBS will start to shine in the 2 years - that is if the government doesnt waste taxpayers money on buying out outstanding shares to providing to businesses willy nilly only to see this blow up in the taxpayers face a few years down the track.
Non core assets are down, oustanding government loans paid back, soon to quick the government sponsored asset protection scheme, Direct Line Insurance soon to be floated, the only REAL ISSUES are the Irish loans and the potential legal liability of the LIBOR scandal

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