WHAT is fascinating about the RBS third-quarter results is not the impressive £400 million set aside to cover potential fines for alleged currency rigging but the even more impressive pre-tax profit of £1.27 billion.
After all, RBS is a business and businesses are supposed to make money. New-ish boss, New Zealander Ross McEwan, seems to have grasped this basic rule. In the same quarter last year, the bank registered a £634m loss.
Two factors are helping RBS get back into profit. The first is the general improvement in the UK economy, even if the high growth rate of the past two years has started to moderate. The second has to do with McEwan himself. He is less focused on managing decline and downsizing than his predecessor Stephen Hester.
Hester took the easy route of flogging off profitable bits of RBS to generate funds. He dumped the bank’s Dublin-based aircraft leasing division in 2012, just as the world’s airlines desperately needed to replace their older gas-guzzling jets – a move criticised in this column at the time. Now re-branded as SMBC Aviation Capital, it has just ordered 115 new Airbus A320s, and is on course to be the world’s third-biggest aircraft lessor.
McEwan is taking a different tack. He has just reversed Hester’s decision to sell the Ulster Bank division, which lost £2.5bn as a result of bad property deals. However, the Irish economy has staged a spectacular recovery, with GDP now surging at an annualised 7.7 per cent. As a result, the local property market has revived. Ulster Bank reported a £394m profit in Q3.
Curiously, the markets seem unimpressed. RBS shares were up yesterday but are still trading lower than at the start of October. The explanation probably lies in the fact that McEwan won’t consider paying a dividend until RBS has strengthened its capital position and finally got to grips with the endless misconduct charges. RBS currently has a core tier 1 capital ratio of 10.8 per cent but McEwan has his eyes set on reaching 12 per cent.
Protection that may actually add to risks
Yesterday the Bank of England added to banking woes by imposing a much stricter leverage ratio than recommended by the Basel Committee, the international arbiter.
The leverage ratio is a blanket rule telling banks how much reserves they need to keep relative to the size of their loan book. It differs from the tier 1 ratio, which links the investors’ share capital to risk-weighted assets.
The tier 1 rule makes the shareholders ante up and is a good way of eliminating moral hazard when it comes to discouraging banks from reckless priority trading (which caused the 2008 credit crunch). The Bank of England worries that institutions can get round the tier 1 hurdle by – God forbid! – fiddling how they calculate riskier loans. Hence the new leverage ratio of 4.95 per cent for the bigger banks, from 2019.
Of course, all rules are there to be broken. Bumping up the leverage ratio could lead to some banks actually making riskier loans, as the quality of risks is not assessed. Also, making banks keep £4.95 for every £100 they lend, instead of £3 as at present, is not going to help boost lending.
Memo to Mark Carney: If you want to make banks behave, let them go bust if they don’t.
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