RBS swings into red with £1.4bn loss

The fragility of the banking sector recovery was starkly exposed on Friday as Royal Bank of Scotland swung back into a loss in the third quarter, after £1.7bn of accounting charges took the shine off improvements at its core businesses.

The government-backed bank, which has warned its recovery would not necessarily be a smooth ride, posted a pre-tax loss of £1.4bn for the three months to September, compared with a profit of £1.2bn three months earlier.

Stephen Hester, the bank’s chief executive, said the loss had been driven by some “distortive” accounting items and masked the progress the bank had made in turning round its underlying businesses.

Stripping out one-off charges relating to the value of the bank’s debt and insured assets, RBS posted a profit of £726m, almost triple the sum it made in the second quarter.

This improvement was fuelled by a strong recovery in the retail business, where profits rose 12 per cent as net interest margins widened and bad debts fell.

RBS also made better-than-expected progress in winding down unwanted legacy assets and narrowed losses at the insurance business, which it must sell by 2013.

Mr Hester said the insurance business would be “nicely profitable” next year, but it would be “stupid” to sell it before 2012.

However, Mr Hester warned of “headwinds” in the retail business, which could slow the pace of margin expansion next year.

The trend of existing mortgage customers switching to more expensive rates was petering out, while low interest rates would continue to weigh on savings, he said.

RBS’ investment banking division, Global Banking and Markets, had a tougher quarter, as renewed market volatility and subdued trading volumes pushed underlying revenues down 20 per cent to £1.5bn.

The bank set aside 40 per cent of the division’s income for staff pay and bonuses in the third quarter – a significant jump from last year, albeit in line with other investment banks.

So far this year RBS has set aside 34 per cent of GBM’s revenue for pay, compared with 25 per cent this time last year.

Mr Hester struck a cautious note on the bank’s broader prospects, saying the combined effect of higher capital requirements and the new tax on banks’ balance sheets could slow growth and make it harder to lend.

“While it is not raining hard, there are still clouds on the horizon,” he said.

Net lending to small businesses fell in the third quarter, in spite of a 15 per cent year-on-year increase in new loans, as customers continued to repay more than they borrowed.

The bank’s shares closed down 4.4 per cent at 45p, a fall analysts attributed to the weakness in the investment bank and continued concern about Ireland, where impairment losses have remained severe.

Steven Hayne at Morgan Stanley said that while the progress in both the core and non-core business was good, investors had to look at the whole of RBS. “It is still a big and complicated business,” he said.