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RBS bad loan related losses 'significantly' lower RBS shares jump on lower bad debt provisions
(about 3 hours later)
Stronger economic conditions are boosting the recovery at Royal Bank of Scotland after it cut the amount of money it is setting aside to cover bad loans. Shares in taxpayer-owned Royal Bank of Scotland hit an 11-month high today as it said a much-improved economy, especially in Ireland, meant it could make lower provisions for bad debts.
The taxpayer-backed bank issued an unscheduled trading update today in which it said it expects to significantly beat its previous guidance for around £1 billion of loan impairments in the current financial year. The bank, which is 80 per cent owned by the taxpayer following its £45 billion bailout, issued an unscheduled trading update today saying it “expects to significantly outperform” its previous guidance for bad debt provisions of £1 billion this year.
This has been driven by improved performances at Ulster Bank and RBS Capital Resolution, which contains the bank's troublesome assets. This was its third positive upgrade this year.
However, the bank warned it still faced many bumps on the road to recovery, particularly relating to conduct and litigation matters. The latest one comes from its so-called “bad bank”, where losses will be £500 million lower than previously expected, and Ulster Bank, with £300 million less. RBS said this was due both to economic improvements in the UK and Ireland and improvements in assets prices, notably property.
RBS will release a fuller update on October 31 but in the wake of today's statement shares continued their recent recovery with a rise of 4 per cent. Chief executive Ross McEwan said the bank had seen a “decisive turn in the economic cycle”. But he repeated his constant caution that “previously disclosed uncertainties remain, particularly relating to conduct and litigation matters”.
The improved economic picture means the bad bank operation will no longer require debt provisions worth £500 million in the third quarter. RBS is one of six banks expected to face hefty penalties shortly from the Financial Conduct Authority and international regulators over its role in alleged foreign exchange benchmark rigging. It was fined a total of £390 million for manipulating the key Libor interest rate last year.
Rising Irish residential property prices as well as pro-active debt management have resulted in lower arrears in Ulster Bank, meaning the division has been able to release £300 million of loan provisions in the three-month period. The bank also cautioned: “Corporate and institutional banking revenues have been weaker than anticipated in the third quarter.” McEwan is already shrinking what are largely investment banking activities in this area of the bank, but the summer saw a general fall in financial market revenues across the world.
It said the potential exists for further releases in future, if market conditions continue to improve. The £500 million writebacks  at RBS Capital Resolution (RCR), or the bad bank, could be just the start, the bank said. It added: “The potential exists, if market conditions remain favourable, for RCR to incur limited future impairments and disposal losses, and an accelerated timetable to achieve its wind-down goals.”
The wider RBS business has also been helped by an absence of large one-off impairments and lower levels of new non-performing loans in the quarter. Likewise, improvements in Ulster could mean further releases of provisions already made for bad debts, which across the bank totalled £8 billion at the start of this year. With the good news far outweighing the bad, RBS shares rose 13.7p, or nearly 4 per cent, to 375.1p — their highest since October 2013.
This has been offset by a warning that corporate and institutional banking revenues have been weaker than anticipated in the third quarter.
RBS is among six banks set to receive a record fine from the City regulator in order to settle an investigation into the manipulation of currency markets.
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