RBS swings to quarterly profit as share reshuffle paves way for dividend

The taxpayer-owned bank swung to a net profit of £259m in the first three months of 2017, up from a £968m loss a year ago and the £4.4bn loss in the fourth quarter of last year.

Adjusted pre-tax profit of £1.4bn beat the consensus forecast of £0.9bn.

No dividend was proposed, as expected, but a reorganisation of RBS's share capital was proposed later this year to make it easier to pay dividends, which is expected to increase parent company RBSG's distributable reserves by around £30bn.

Across its core Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets (NWM) businesses, RBS lifted operating profits 30% to £1.3bn.

Group adjusted income of £3.2bn was 15.1% higher year-on-year, with net interest income of £2.2bn slightly higher than the first and fourth quarters of 2016.

There were still some sizeable exceptional costs, with restructuring costs of £577m for the quarter up by £339m compared with the same quarter last year, while the cost of provisions for litigation and fines was just £54m versus £31m a year ago but following the massive £4.1bn set aside in the final quarter of 2016.

Net interest margin, banks' crucial difference between the rate earned on loan and the rate paid out deposits, improved to 2.24% for the quarter, up nine basis over Q1 last year and five basis points compared with Q4. This came as a fifth-straight quarter of loan growth lifted the loan:deposit ratio to 93% from 91%.

Adjusted return on equity across PBB, CPB and NatWest Markets strengthened to 13.8% from 10.9% a year ago.

RBS strengthened its capital position too, with its regulatory Common Equity Tier 1 ratio increasing by 70 basis points in the quarter to 14.1%, well up on its 13.0% target.

Management re-iterated all of its full-year guidance, with annual profitability the goal for 2018.

Market and analyst reaction

RBS shares broke through the 264p mark in early trading, the first time above this level in more than a year, and by 1100 BST were up 1.7% at 257.75p.

Analyst Gary Greenwood at broker Shore Capital said while the bank continues to make progress at an underlying level, there remain a number of significant legacy issues that continue to overhang the investment case, including RMBS settlement and agreeing the alternative proposals to a sale of its Williams & Glyn unit as part of a European Commission investigation.

"So, despite recording a Q1 statutory profit, it is expected that the full year result will be another year of losses (taking RBS to a decade of losses) before the group is anticipated by management to move back into profit in 2018."

Hargreaves Lansdown analyst Laith Khalaf noted that the retail bank appeared to be chugging along quite nicely and even the investment bank chipped in with some decent numbers.

"It’s too early to pop the champagne corks though, because the US Department of Justice is likely to play the role of party pooper at some point, by landing RBS with a massive fine," they said, with the W&G saga likely to cost RBS more money.

"These longstanding problems aside, this could be the year when RBS finally starts to look a bit more like a swan, rather than an ugly duckling," Khalaf said, with the state's 73% stake still languishing at around half the price paid during the bailout.

Russ Mould at AJ Bell opined that the low underlying growth on offer from banks and the relatively low quality of earnings increases means they will need to offer a juicy dividend yield to entice investors to hold the shares and compensate them for the risks involved.

“RBS today has reaffirmed its goal of reaching profitability in 2018 and the announcement of a reorganisation of its share capital in 2017 gives the lender greater scope to resume dividend payments, which have been absent since 2007.”