Comment: Fall in write–offs gives bank a smoother ride

Martin Flanagan

Martin Flanagan

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THERE will be more bumps in the road ahead for Royal Bank of Scotland, as chief executive Ross McEwan has predicted. But the part-taxpayer owned bank has hit a welcome stretch of smooth tarmac over the summer.

RBS cheered the market yesterday by revealing that it will be able to release £800 million of previously allocated write-offs against bad loans, helped by a better picture emerging at both its so-called “bad bank” for problem assets and its Ulster Bank subsidiary.

Both the Irish unit and the bad bank, RBS Capital Resolution (RCR), have been a drag on the business for several years now, pre-dating McEwan and going back to predecessor Stephen Hester’s radical financial reconstruction of the business.

It is therefore unsurprising that the trading update saw RBS’s shares jump 4 per cent, before settling and closing the day up 6.8p, or 1.9 per cent, at 368.2p, still the best performer in a generally flat European banking sector.

It was music to the City’s ears that RBS said it had been selling problematic loans from its bad bank more quickly and at better prices than it had expected, with the effect that it does not have to set aside so much in provisions against those assets. RBS has released £500m it had set aside for RCR in the third quarter to end-September, much of it related to commercial property assets in a previously boom-and-bust Irish real estate market.

And Ulster Bank is able to release £300m in write-offs because of an improving economic picture. RBS also held out the prospect of cutting its provisions even further, and accelerating the wind-down of its bad bank, if market conditions remained favourable.

The good news was strong enough to be untarnished by a weaker-than-expected performance by the bank’s corporate and institutional banking division in Q3.

Bluntly, that is probably because the City no longer considers the group’s investment banking division that important to the group’s prospects in the medium-term following its pretty radical retrenchment at the not subtle behest of the government.

Whitehall backs McEwan’s strategy of mainly focusing on lending to UK households and small businesses rather than stateside diversions.

The first tranche of the Citizens Financial flotation on Wall Street last week, accompanied by the good news on the provisions front, will be seen as twin-boosters for that new strategy.

The next bump in the road, to show that the RBS’s car’s suspension is still taking knocks, is likely to be a sizeable fine for its traders’ part in allegedly manipulating the foreign exchange market along with several other banks.

But fair play: RBS had a good day at the office yesterday.

UK economy was not as sick as we thought

THE UK economy was walking round the daisies when we still thought it was in the convalescent ward. New revised official data show gross domestic product reached its pre-recession peak in Q3 of 2013 rather than in the second quarter of 2014 as previously thought.

It means the economy is now 2.7 per cent larger than it was in the first quarter of 2008, just before the last recession.

The Labour Party will again try and make the shrewd distinction between the “abstract” recovery and the cost of living for millions.

But the figures are still good news for the Conservatives’ economic credibility.

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