The Motley Fool Previous Page

Royal Bank of Scotland's Long Road to Recovery

David Holding
May 7, 2011

This article has been adapted from Fool UK, our sister site across the pond.

You could almost hear shareholders of Royal Bank of Scotland  (NYSE: RBS  ) breathing a collective sigh of relief yesterday.

The 83% state-owned bank reported a first-quarter operating profit of 1.053 billion pounds (ignoring tax and charges) as bad loan charges fell. Total income was down to 7.6 billion pounds from 8.2 billion pounds last year -- mainly because market conditions weren't as favorable for RBS's investment-banking arm, Global Banking and Markets.

But there was still an overall net loss of 528 million pounds, in large part because of a charge of 469 million pounds from a market valuation of credit insurance provided to RBS by taxpayers under the Asset Protection Scheme (APS). Such is the penalty for previous misdeeds, as the banks must stump up more for funding and hold more liquidity.

The bank also suffered impairment charges of 2.0 billion pounds, including 1.3 billion pounds in relation to its Ulster Bank subsidiary, though its insurance business, which it plans to sell off, returned to profit.

RBS's chief executive, Stephen Hester, reckons that the bank is showing continuing progress, and the market seems to agree so far. The shares have responded positively to the results.

What RBS didn't do was to set aside any cash to meet its probable obligations from mis-sold payment protection insurance, unlike Lloyds Banking Group  (NYSE: LYG  ) , which put a jaw-dropping 3.2 billion pounds to the side. It seemed to concede defeat over the legal case brought by the banking-industry body, the British Bankers' Association. 

Meanwhile, RBS says the eventual cost could prove to be "material" -- no kidding!