LONDON -- RBS (LSE: RBS.L) is the last of the big London banks to report, and after hearing apologies from Barclays (LSE: BARC.L) and HSBC (LSE: HSBA.L) for serious errors in judgment (to put it lightly), the bank's management was probably happy to only have to apologize for a computer failure rather than a failure in ethics. It's always easier when you can blame the machines.
The costs related to the computer system crash were also easier to stomach as the 125 million pound provision set aside for the incident was a modest amount compared to the reported 1.8 billion pound operating profit through the first half of the year.
If we ignore the 1.4 billion pounds in operating losses from what RBS has classified as non-core assets (all 72 billion pounds of them), operating profits from core operations were 3.2 billion pounds, down 19% from a year ago despite lower insurance claims and loan impairment costs. Part of the problem comes from the investment banking operations -- which RBS calls its markets division -- which are suffering because of the dreadful conditions in European financial markets. Fair enough, this will likely bounce back eventually.
The other drag was the U.K. retail banking segment, which reported a 13% drop in operating profit as a result of an 11% drop in income. RBS, like Lloyds (LSE: LLOY.L), is trying to shrink its balance sheet by getting rid of some of its more troubled retail operations; the U.K. retail business is still at the heart of the business, so seeing this type of performance isn't reassuring.
Of course, neither are talks about fully nationalizing the bank, which I think miss the point of what is plaguing the U.K. (and European) banking markets. But that is a topic for another article.
RBS' management faces significant challenges in re-establishing the bank's reputation -- and recent revelations about industry peers don't help -- and while declining loan impairments and rising capital levels show things are improving RBS has a long way to go. If I was daring enough to look for exposure to the financial sector, I think I'd look elsewhere.
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