Fewer fines and write-downs help Royal Bank of Scotland Group plc (LON:RBS) post a gain.
Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) shares were down 5% early this morning despite the bank reporting its first quarterly profit since September 2011. Lower impairment losses and no costs associated with the mis-selling of payment protection insurance resulted in £826m in pre-tax profit.
CEO Stephen Hester said he expects the bank to "substantially complete the Bank's restructuring phase during 2014" and chairman Sir Philip Hampton announced his expectations that the bank would be ready for re-privatisation by the middle of next year.
It would appear, however, that there remains work to be done, as the bank's non-core assets remain at £53bn and, despite significant job cutting, staff costs remain at 32% of total income.
Part of the problem on that front is that income continues to slide as the bank tries to adjust its balance sheet away from troubled and confusing assets into safer, simpler loans -- what those in the industry like to call 'de-risking'.
However, being selective about the loans you write generally reduces growth and, with strong competition for high-quality loans, RBS is facing some pricing pressure. The group's net interest margin -- essentially, the spread between what it pays on deposits and what it charges on loans -- was up from a year ago, but the core operations saw margins slip ever so slightly.
The good news is that the bank appears to be writing better loans (or selling off the bad ones) as loan impairments dropped 20% from a year ago to just over £1,000m. Additionally the bank's Tier 1 ratio -- what regulators and investors look at to determine how safe a bank is -- improved from 7.7% at year-end to 8.2%, making solid progress towards the 2013 goal of 9%.
Looking forward, RBS has plenty of funding to start re-growing its loan book if the opportunities arise, as deposits were up 1% in the quarter and the loan-to-deposit ratio -- a measure of how leveraged a bank is -- for the core operations remains at 90%.
Is this the beginning of the road up for RBS? Given all the surprises we've seen from banks in recent years, it would be brave to say yes -- but the bank has made solid progress in sorting out its troubled assets, and while its core operation are still shrinking, they are showing signs of stability.
With the shares trading at half of book value, it would appear much doubt and pessimism is already priced in, but many investors will need to see core operations start to grow before they take these shares seriously.
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> Nate does not own any share mentioned in this article.