RBS making progress, but analysts raise concerns about future costs

Third-quarter results from RBS were well-received by the stock market in London on Friday with shares rising strongly after better-than-expected profits and an improved balance sheet, though brokers remained divided over how to recommend the stock to investors.

Analysts warned that, despite the progress made in the third quarter, one-off costs will continue to be a drag on RBS' bottom line going forward.

RBS reported a pre-tax profit of £1.27bn for the July-September period, compared with a loss of £634m the year before and the consensus forecast of £1.1bn. The latest three months included a net impairment provision of £801m, mainly from Ulster Bank and RBS Capital Resolution, and litigation and conduct costs of £780m.

Management also warned that it still has a "long list" of conduct and litigation issues to deal with in the future.

Meanwhile, the common-equity tier-1 capital ratio rose 70 basis points (bp) over the third quarter at 10.8%. The company's leverage ratio - which will be tested in the Prudential Regulation Authority's health check - improved by 20bp to 3.9%. The FPC is widely expected to introduce a leverage ratio threshold of between 4-5% when it announces its review at 14:00 on Friday.

Analysts on the whole praised the strong profit performance and the progress made to improve capital ratios.

"However, there remains further work to do on improving the leverage ratio," said Gary Greenwood from Shore Capital. "That said, we expect a transition period to be put in place that will allow the company to meet this requirement without needing to materially alter its business plan," he said.

Greenwood kept a 'hold' rating on the stock, saying that while the bank is "clearly seeing good momentum", the unresolved conduct and litigation risks "cannot be ignored".

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers also said that "a number of issues remain unresolved", such as the conduct and litigation issues which "will continue to be costly, time-consuming and distracting". There are also restructuring costs to be considered, he said.

Hunter acknowledged that there were certainly some "bright spots" in the third-quarter results, such as the P&L statement, but said "it may not yet be enough to alter the current market consensus of the shares as a 'sell'".

Ian Gordon from Investec maintained his 'hold' stance on the stock.

While he highlighted the "excellent progress" made to repair the balance sheet, he said: "We think higher restructuring, conduct and impairment charges are still set to deliver a (marginal) attributable loss in 2015, and with the stock already trading at a premium rating to UK bank peers we struggle to identify a sufficiently rapid recovery in earnings and returns to sustain material further upside from here."

The stock was 3.4% higher at 377.7p by 10:40.