FCA report casts shadow over RBS trading update

Royal Bank of Scotland will update investors on trading on Friday but questions about the bank's treatment of small business customers could overshadow the day.

Analysts' consensus is for adjusted operating profit for the third quarter of £1bn compared with £1.2bn a year earlier. Annual profit on the same basis is forecast to increase to £4.8bn from £3.7bn.

Analysts at Barclays said the main question on current trading was the trade-off between margin and sales volumes in the UK business after RBS indicated it had expanded its mortgage lending. The performance of its fixed-income business is also under the spotlight after revenue at US investment banks came under pressure.

But RBS continues to be beset by problems from its past. Barclays is looking for an update on the bank's discussions with the US Department of Justice over its selling of mortgage-backed securities before the financial crisis.

In the UK, RBS has been under long-standing pressure over its handling of business customers in the five years after 2008. On Monday, the Financial Conduct Authority said it was considering a full investigation of RBS's GRG unit, which former customers accuse of driving them out of business.

The FCA released a summary of an independent report that, though it found no criminality at GRG, identified "inappropriate treatment" of viable businesses. RBS set aside £400m to compensate small businesses in November 2016 but the report has raised doubts about whether that sum is sufficient.

RBS's chief executive, Ross McEwan, said shortly after the report was published that the worst allegations against the bank had not been upheld. He admitted mistakes were made but said the FCA supported the steps RBS had taken to put things right.

But the media had little time to examine the report before questioning McEwan and investors have not had the chance to ask management about its implications.

Michael Hewson, chief market analyst at CMC Markets, said: "One can’t help but think RBS's numbers could well be overshadowed by the controversy over how it treated small businesses in respect of its GRG unit. It is yet another legacy issue that needs resolving before it can truly be said the bank has turned a corner."

McEwan became chief executive at RBS four years ago. He has tried to strip the bank back to the basics of UK banking after it nearly collapsed at the peak of the financial crisis in 2008.

He has advocated a return to honesty and customer service in banking but critics have said he should have been more sympathetic to the claims of GRG customers. The bank was bailed out by the government during the financial crisis and remains 70% owned by taxpayers.

Lloyds Banking Group published its third quarter trading update on Wednesday. Britain's biggest retail bank increased its impairment charge for bad loans by more than expected. With the economy slowing, investors will look to see if RBS does the same.