Royal Bank’s profits rise is “calm before storm”

Royal Bank of Scotland yesterday unveiled a doubling in profits but its results were branded “the calm before the storm” in the City after its chief executive warned overhanging problems remained.

RBS saw its share price rise but chief executive Ross McEwan said there were still plenty of issues from the past to reckon with. Picture: TSPL

Ross McEwan said there were still “plenty of issues from the past to reckon with”, amid continuing regulatory probes for which any potential financial penalties were unknown.

His remarks came as the bank revealed pre-tax profits rose to £1.64 billion in the first three months of this year compared with £826 million in the same period of 2013.

RBS’s shares leapt 8.2 per cent to close at 331.7p, having risen by as much as 13 per cent earlier, on a profits performance well ahead of City expectations.

But Richard Hunter, head of equities at stockbroker Hargreaves Lansdown, said that although the performance had been “respectable”, the better headline numbers might “represent the calm before the storm”.

He said: “The bank is still in the midst of dealing with its legacy issues, and has warned that there will be a considerable rise in costs as the year progresses, driven both by the restructure and the possibility of further regulatory fines.

“RBS is pursuing a similar route to Lloyds in preparing to simplify and focus its operations, but Lloyds is much further down the road.”

RBS is among several major banks helping global regulators probe allegations of collusion and price-rigging in the international currency markets.

Various investor action groups have also filed lawsuits against the Edinburgh-based bank claiming they were misled over its financial strength at the time of its £12bn rights issue in 2008.

McEwan said there would be no out-of-court settlement with these groups, which include the RBS Rights Issue Action Group and the RBoS Shareholders Action Group, because the bank believed it had good defences against the claims.

The retail and commercial banking division boosted profits 36 per cent to £1.4bn in the latest quarter, while the sharply pruned investment banking arm lifted profits 14 per cent to £318m.

The troubled Ulster Bank subsidiary posted its first quarterly operating profit – £17m – since 2009. RBS’s group net profits rose to £1.2bn from £400m.

Group bad debts fell sharply, while the key cost/income ratio fell 2 per cent to 66 per cent.

McEwan said RBS, continuing its recovery after its record £24bn loss and taxpayer bailout six years ago, was now creating a “simpler, smaller and fairer bank”. He said: “Today’s results show that in steady state, RBS will be a bank that does a great job for customers while delivering good returns for our shareholders.”

McEwan, who took over from Stephen Hester last autumn, confirmed the bank was on track to float its US business Citizens late in 2014.

RBS is also to spend £750m over three years to improve the “security and resilience” of its IT systems following public failures in recent years.

The bank’s results statement said: “The ongoing conduct and regulatory investigations and litigation continue to create challenges and uncertainties for RBS, as for other banks. The timing and amounts of any further settlements are as yet unknown.”