RBS smashes expectations with £940m profit

RBS warns of future profit hit from past misconduct

30 October

Royal Bank of Scotland has become the latest of the big high street banks to warn it could still face a major hit to future profits from past wrongdoing.

In its third-quarter results announcement, which revealed a drop in underlying profit and close to £1bn of restructuring and redress provisions, the bank cautioned that the bill for past misconduct could continue to climb and be "substantially greater" than the £4.5bn it has already set aside.

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It added that the timing and size of penalties is "uncertain2, the BBC notes.

RBS took another £129m of conduct and litigation charges for the three months to September, which the Financial Times says was mainly to cover mortgage-backed securities cases. It also reported restructuring costs of £847m over the quarter.

This would have left it with a sizeable net loss, but for the fact that it closed off the quarter by selling its remaining interest in US banking brand Citizens. It banked a £1.1bn gain and posted an overall pre-tax profit of £952m, well ahead of analyst expectations.

Investors were largely focusing on the negatives on Friday morning, pushing the bank's shares around 1.1 per cent lower to 317p in early trading. In addition to the warning on misconduct expenses, focus is falling on operating profits that dropped to £842m from £2bn last year.

While this in part reflects an accounting revision that substantially improved the position of its 'toxic' loan book last year, it was also caused in part by a drop in revenues from £3.6bn to £3bn as the bank downsized.

On the plus side - and protecting the bank from a sharper shares decline - there was a rise in core mortgage and commercial lending, with the former rising 3.6 per cent.

Capital reserves also jumped from 12.3 per cent to 12.7 per cent, which will give investors confidence in RBS's financial strength. More importantly, it will also raise the prospect of dividends being restarted.

RBS has said in the past that it would look to return excess capital above a 13 per cent capital buffer to investors, which would significantly enhance the investment proposition and help the government’s plans to dispose of its interest.

However, the bank has consistently asserted that it first needs to complete its restructuring and that payouts are unlikely before the first quarter of 2017 at the earliest.

RBS exit closer after Treasury share conversion

9 October

Government plans to offload the public's shareholding in Royal Bank of Scotland took another critical step forward yesterday.

The bank announced it was converting a chunk of special 'class B' shares currently held by the taxpayer into ordinary shares. This effectively removes a complexity within the capital structure, which was put in place to accommodate the bank's bailout in 2008, without having to undertake a full nationalisation.

Under stock market rules, no single shareholder can control more than 75 per cent of the voting rights in a listed company. When the Labour government bailed out RBS in the form of a capital injection in 2008, its shareholding would have equated to close to 80 per cent.

To avoid breaching the rule and potentially being forced to take the bank private, a portion of the taxpayer interest was acquired through a separate class of shares with no voting rights and which were not publicly traded.

The Government holds 51 billion such shares with a nominal value of 1p each, which the Daily Telegraph says will be converted into 5.1 billion new ordinary shares with a nominal value of 100p.

FastFT adds that £4.6bn will be transferred into the bank's issued share account to ensure the new shares rank equal with existing stock. The Government's stake will remain at the 72.9 per cent it fell to after its first £2bn disposal in August.

Shares in RBS were up around one per cent on Friday morning to 334p, back above the level at which the summer sale took place after a recent dip.

Could RBS buy back its own shares from the government?

30 September

The Royal Bank of Scotland could hasten the UK government's plan to sell off its stake in the bank by buying back its own shares, according to chief executive Ross McEwan.

During a conference in the City of London on Tuesday, McEwan said he was keen to begin redistributing capital to shareholders and that this could take the form of share buybacks. The Guardian notes that George Osborne has pledged to sell three-quarters of taxpayers' stake within five years, and McEwan could capitalise on that.

He said: "My personal view is I would rather participate as the government is selling down, be part of that exercise and at some stage put a dividend policy in place. It’s probably the best thing for all investors when excess capital goes back through buybacks."

UK Financial Investments, which controls the public interest in the banking sector, sold around 5.4 per cent of its then 78 per cent shareholding in August at a price of 330p per share, which crystallised a £1bn loss. However the sale price, which at the time was a 52-week low, now appears high. Shares were changing hands at 315p at lunchtime on Wednesday, up two per cent on the day.

Buybacks would speed up the process of offloading its stake for the Government, but would be unlikely to start soon. RBS has said it will seek to redistribute capital above a 13 per cent target for reserves. At its latest results it reported reserves had reached 12.3 per cent (see below) and, notwithstanding any further hits from past wrongdoing, McEwan indicated it would probably be in a position to begin payouts in whatever form by the beginning of 2017.

Past misdemeanours continue to haunt the bank. This week it has again been in the headlines in relation to allegations that it put small businesses intentionally under strain to boost its own fees, which remain the subject of an ongoing regulatory probe.

RBS faces fresh allegations from small business client

28 September

Royal Bank of Scotland is facing fresh allegations over its handling of small business customers, after a former Metropolitan Police sergeant whose company failed alleged the bank modified records held on him.

Andy Keats, an RBS customer and a director of a company that helps small businesses with commercial disputes, obtained records held on him under the terms of the Data Protection Act, The Times reports. He is one of many small business owners claiming the bank's restructuring division caused his firm to fail, following which the bank sought to take possession of his home.

Keats alleges that records were amended, including the deletion of passages and editing of punctuation in emails detailing his financial position and a previous complaint against Worldpay, a payment processing company that was owned by RBS until 2010.

The paper says the Information Commissioner's Office and the Financial Conduct Authority are aware of the claims. RBS refused to comment but said that it "takes its obligations under the Data Protection Act very seriously at all times".

The restructuring division is an arm of the bank that is being cast aside in a restructuring to be concluded over the coming couple of years, but that could prove very costly in relation to past complaints. A regulatory review is ongoing that could yet result in a consumer compensation scheme being set up (see below).

RBS shares were continuing a recent losing streak at lunchtime in London, down 2.5 per cent to 311p. This is significantly below the 330p at which a recent government share sale took place, which itself crystallised a £1bn loss for the taxpayer.

RBS share sale advice to be scrutinised

22 September

UK Financial Investments, the arm of the UK government that controls the taxpayer's now 73 per cent stake in Royal Bank of Scotland, is facing further scrutiny over its decision to sell £2bn worth of shares at a loss last month.

The Daily Mail reports the Treasury Select Committee has written to UKFI boss James Leigh-Pemberton requesting the company hand over advice received urging the government to press ahead with the sale. Committee chairman Andrew Tyrie also demanded "details of safeguards… to protect against insider trading", after data showed hedge funds increased bets on a fall in the price in the lead up to the sale. Some critics argued that a number of press reports pointed to a leak.

Leigh-Pemberton appeared before the committee earlier this month and denied his office would have leaked the impending sale. He suggested that the bailout price and losses measured against it should be ignored for the purposes of determining whether a sale represented good value in the current market.

The £2.1bn share sale was made when shares were at 330p, below the 502p at which the government stake was acquired but also below the trailing 52-week average. Shares have since fallen further, however, and were trading at a little more than 311p this morning.

The Times, which had revealed the sale several days before it eventually took place, says MPs are particularly interested to know "why the government needed to commission a separate report into the sale from Rothschild, despite having an in-house advisory team". Tyrie said the decision could "cast doubt on the quality of this advice."

The paper adds some have "questioned why the government had not explored other options for the stake, such as a more complex arrangement that might have allowed the taxpayer to share in any future rise in the stock price."