RBS shares surge as profits climb
8:00am Friday 2nd May 2014 in © Press Association 2014
A shares surge added £2.5 billion to the value of state-backed Royal Bank of Scotland today after it said quarterly profits had doubled.
RBS, which is 80% owned by the taxpayer, said profits before tax had risen to £1.64 billion from £826 million in the same period last year.
Meanwhile chief executive Ross McEwan indicated he would get round a Government veto on giving bankers bonuses of twice their salaries by making changes to ensure he could pay enough to hold on to top staff.
Shares in RBS rose by as much as 13% after it published figures for the first quarter of the year, later settling back to about 9% - despite a warning from Mr McEwan that there were still "plenty of issues from the past to reckon with".
The trading update was the first since the group announced that it had tumbled to an £8.2 billion loss for 2013 and launched a mammoth overhaul to slash costs by £5 billion within three years.
This time, there were no new hits to cover past scandals or litigation, or major provisions such as the £4.8 billion write-off it recently took to create a "bad bank" where it could hive off toxic assets.
RBS said it had seen a modest revival in lending volumes during the quarter, with improvements in UK retail and business banking while income from its markets business was lower as it shrunk its balance sheet. Costs also fell.
Mr McEwan said the latest figures showed the "great job" it could achieve while in a "steady state".
"But we still have a lot of work to do and plenty of issues from the past to reckon with," he added.
However there was no mention of any plans to start returning the taxpayer stake to the private sector, in contrast to the buoyant first quarter announcement in 2013 when RBS said the Government should be able to start the process within a year.
While today's shares surge saw the price climb close to 350p, this was well off the 500p needed for the Treasury to achieve "break even" value on its £45 billion rescue of the bank at the height of the financial crisis.
Meanwhile, Mr McEwan said that he would do what it takes to hold on to highly-paid bankers affected by the Treasury's veto on its plans to be able to pay 200% bonuses.
Asked whether fixed salaries for those employees would be raised to compensate, he said: "I just want to make sure that we are in a position to pay those people so we can retain them."
The quarterly trading update noted that all the group's major competitors planned to be able to pay bonuses at twice the rate of salary - which must be approved by shareholders under new European rules. RBS is limited to paying 100% bonuses.
It said this created a "commercial and prudential risk which it must try to mitigate within the framework of a 1:1 fixed to variable compensation ratio".
Mr McEwan acknowledged that it was an "emotive issue" but said RBS was a "back marker" on pay, adding: "It is important that we stay in the pack rather than being out on our own as we do change this business."
The chief executive said the cap affected a small number of people involved in its international markets division, in its restructuring operation, and in the US.
He said: "We are not going to pretend that this is ideal.
"Not having the flexibility does involve an element of risk for us but it is a risk that I as chief executive am going to have to manage and we are having to make some changes to those people to make sure we hold on to them."
In its trading update, RBS said it was seeing increasing economic confidence in some areas and expected a modest increase in margin for the remainder of the year.
But it is likely to be hit by costs as part of its restructuring plan that are "considerably higher".
It also admitted that it would continue to be haunted by misdemeanours of previous years, which have seen the bank shell out billions of pounds over issues such as payment protection insurance (PPI) mis-selling.
RBS 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 or redress remain uncertain."
The bank said it was on course to achieve targets for improving the level of capital on its balance sheet - a measure lenders have been ordered to take by regulators in the wake of the financial crisis, to bolster their ability to absorb shocks.
Also in the update, it said its troubled Ulster Bank subsidiary reported its first quarterly operating profit since 2009. It earned £17 million in the period, compared with a £164 million loss in the same quarter last year and a £996 million loss in the fourth quarter of 2013.
RBS also said it was shaking up computer systems for NatWest and Ulster Bank as part of a wider £750 million three-year programme to improve "safety, security and resilience" - following a series of IT failures across the group in recent years.
Shore Capital analyst Garry Greenwood said: "While 'one swallow doesn't make a summer', we believe that the Q1 2014 outcome represents an excellent start to the year for the group following recent disappointment.
"That said, there is still plenty of work to do before RBS gets back to being a 'normal' bank."