Royal Bank of Scotland Moves Into Profit in the First Quarter

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LONDON -- Royal Bank of Scotland (LSE: RBS  ) (NYSE: RBS  ) shares are down 6% late in London trading, even though the bank reported its first quarterly profit since September 2011. Lower impairment losses and a lack of fines associated with the mis-selling of payment protection insurance resulted in a pre-tax profit of 826 million pounds.

CEO Stephen Hester said he expects the bank to "substantially complete the Bank's restructuring phase during 2014," and chairman Sir Philip Hampton announced his expectations that the bank would be ready for reprivatization by the middle of next year.

It would appear, however, that there remains work to be done, as the bank's noncore assets remain at 53 billion pounds, and despite significant job-cutting, staff costs remain at 32% of total income. Part of the problem on that front is that income continues to slide as the bank tries to adjust its balance sheet away from troubled and confusing assets into safer, simpler loans -- what those in the industry like to call "de-risking."

However, being selective about the loans you write generally reduces growth, and given the strong competition for high-quality loans, RBS is facing some pricing pressure. The group's net interest margin -- essentially, the spread between what it pays on deposits and what it charges on loans -- was up from a year ago, but the core operations saw margins slip ever so slightly.

The good news is that the bank appears to be writing better loans (or selling off the bad ones), as loan impairments dropped 20% from a year ago to just more than 1 billion pounds. Additionally, the bank's Tier 1 ratio -- what regulators and investors look at to determine how safe a bank is -- improved from 7.7% at year-end to 8.2%, making solid progress toward the 2013 goal of 9%.

Looking forward, RBS has plenty of funding to start regrowing its loan book if the opportunities arise, as deposits were up 1% in the quarter and the loan-to-deposit ratio -- a measure of how leveraged a bank is -- for the core operations remains at 90%.

Is this the beginning of the road to success for RBS? Given all the surprises we've seen from banks in recent years, it would be brave to say yes -- but the bank has made solid progress in sorting out its troubled assets, and while its core operation are still shrinking, they are showing signs of stability.

With the shares trading at half of book value, it seems much doubt and pessimism is already priced in, but many investors will need to see core operations start to grow before they take these shares seriously.

If your confidence in RBS isn't strong enough to convince you to buy shares, however, you might be interested in these other buying opportunities: This exclusive wealth report reviews five particularly attractive possibilities. Just click here for the report -- it's free.

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9/30/2016 12:01 PM
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