RBS slashes bad debt losses on economic turn

SHARES in Royal Bank of Scotland touched an 11-month high yesterday as the lender revealed an improving economy meant it would take £800 million less in write-offs on bad debts.

Welcome boost for RBS, although chief executive Ross warned of possible bumps in the road ahead. Picture:Getty

In an unscheduled trading update, the state-backed group said it had also benefited from selling assets from its so-called “bad bank”, RBS Capital Resolution (RCR), more quickly and at better prices than it had expected.

That means it does not need to set aside as much for the unwanted assets in the bad bank, which was established earlier this year to sell or run down some of the £29 billion of assets it no longer wants.

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RBS had set aside £4.5bn to cover losses in the bad bank, but said it is now to release about £500m of that for the third trading quarter to September.

In addition, it is to release about £300m in provisions against bad debts it had earmarked for its Irish unit, Ulster Bank, which has suffered severe losses on commercial property loans over several years.

The improvement has come about through general economic improvement in Ireland and rising property real estate asset prices.

Shares in RBS, which is 80 per cent owned by the taxpayer after the bank’s £45bn state bailout in the financial crash, jumped 4 per cent to 376.5p – their highest level since October 2013 – before later closing 1.9 per cent higher at 368.2p.

Chief executive Ross McEwan said the bank had seen a “decisive turn in the economic cycle”. Adding to the good news, RBS said if market conditions remained favourable it could cut its provisions further and speed up the sale or wind-down of RCR assets.

The better news on bad debts and the Irish economic pick-up outweighed the negative of weaker revenues in the bank’s corporate and institutional division in Q3. Ian Gordon, banking analyst with Investec, said: “In pure quantum terms, today’s news helps upgrades for 2014 for RBS. The degree of the release of provision is positive.”

He added: “It’s clear the Irish real estate market has come back significantly and liquidity has improved, allowing RBS to do more transactions and crystallise some recovery of provisions.”

However, McEwan repeated his caution at the time of better-than-expected interim results in the summer that “bumps in the road” also lay ahead for the bank, “particularly relating to conduct and litigation matters”.

RBS, whose share price is still well below the average taxpayer buy-in price of 503p, is one of six banks expected to face hefty fines shortly from the Financial Conduct Authority over its role in alleged foreign exchange benchmark manipulation.

• The Lloyds Action Group yesterday announced it has won a High Court group litigation order for a legal claim against Lloyds for compen- sation for thousands of private shareholders over the controversial rescue of Bank of Scotland owner HBOS in 2008.

Law firm Harcus Sinclair has been appointed lead solicitors in the action, which argues that billions of pounds of shareholder value was destroyed when HBOS was taken over by Lloyds before the latter was itself rescued with a £20bn taxpayer bailout.