Part-nationalised lender Royal Bank of Scotland (RBS) leaps 13.2% to 372.2p as profits beat expectations for the six months to July. In a trading update, released a week early because of the profits performance beat, the bank said pre-tax profits doubled to £2.6 billion from the £1.3 billion it reported a year ago, beating broker Numis’ £2.2 billion forecast.
This was the result of economic improvements, which saw its bad debts fall £269 million to £2.1 billion after pulling back from international markets to concentrate on the UK, a strategy that Lloyds Banking (LLOY) is also pursuing.
Encouragingly for taxpayers and investors, the strong first half from RBS has helped strengthen the bank's balance sheet. Core equity tier 1 ratio, reserves compared to assets, improved to 10.1%, up from 8.6% in January.
The good news, however, is expected to be short-lived. The scandals keep coming for the bank that had to be bailed out by the tax payer to the tune of £45 billion six years ago.
RBS is facing possible fines for allegedly miss-selling mortgage-based securities and manipulating the foreign exchange market. The UK banking industry is also facing calls by the Competition and Markets Authority (CMA) for a new probe into perceived poor competition in retail and small business banking, where RBS is among the market leaders. If the CMA gets its way it could lead to a break-up of several of Britain's banks, including the Edinburgh-based group.
These clouds hover over the bank while it continues to pay the price for past misdemeanours. RBS has allocated a half year £250 million cash pot to compensate customers to whom it miss-sold interest rate swaps and payment protection insurance (PPI) in years gone by.
Stripping out these payments and restructuring costs gives RBS a £3.3 billion operating profit, ahead of Numis’ £2.9 billion forecast.