Enlarge imageBy Clara Ferreira-Marques and Steve Slater
LONDON (Reuters) - Losses at part-nationalised Royal Bank of Scotland more than halved in the third quarter with a sharp reduction in bad debt writeoffs, despite a slump in profits at its beleaguered investment bank.
"I have repeatedly said this is a marathon, not a sprint, and so it is proving," said Stephen Hester, the chief executive brought in a year ago to bring the bank back from the brink of collapse.
The investment banking arm's profits fell to just over a third of its second-quarter levels, hit by impairments and poor trading after favourable conditions in its key commodity and currency markets flattered its performance in the first half.
But there was some good news for RBS's battered investors, as overall bad debts at the bailed-out lender fell 30 percent to 3.3 billion pounds in the three months, and the bank said bad loans were showing signs of "plateauing."
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That helped the bank's third-quarter operating loss narrow to 1.5 billion pounds from 3.5 billion in the second quarter.
RBS cautioned bad loans were expected to "remain at elevated levels for the next few quarters," with conditions in Ireland and the United States remaining difficult.
"It might take as much as a year, or even more, for there to be a significant move down (in bad debts), which is why we are talking of a plateau," Hester said.
At 12:23 p.m. the stock was up 4.5 percent at 36.8p after trading earlier this week down to 33.9p, near six-month lows, when the bank agreed to a deal which will see the government inject 25.5 billion pounds and provide more flexible terms for an insurance scheme for bad debts, but will lift the state's stake to over 84 percent. It is also being forced to sell several assets.
"These are encouraging operating results. Impairment losses are almost stable," analyst Mike Trippitt at Oriel Securities said. "The worry is the rise in risk-weighted assets, with the impact of monoline (insurer) downgrades, pro-cyclicality and foreign exchange. The first two are still a reflection of the (economic) cycle."
RWAs increased by 9 percent, cutting the bank's core tier 1 capital adequacy ratio to 5.5 percent. Including the impact of Tuesday's deal, however, that rose to a proforma 11.1 percent.
DENTED INVESTMENT BANK
RBS's rivals, including Goldman Sachs, BNP Paribas and Credit Suisse have reported strong investment banking profits that have lifted their bottom lines.
But RBS said bad debts and "normalised" trading conditions dented profits at its own Global Banking and Markets unit.
Operating profit at the unit was hit by falling currency, commodity and equities income, shrinking to 375 million pounds from 1.1 billion in the second quarter. Impairments were swollen by a "large individual failure" outside Britain and 320 million pounds in losses on the value of its own debt.
Hester also said EU-imposed sales and bonus caps -- a particular concern for hiring in investment banking -- were making it harder to keep staff motivated. Departures had been "damaging but not destructive," he said.
"We are treading a very delicate tightrope," he added.
RBS's Ulster Bank unit and U.S. retail arm Citizens both made losses, hit by rising bad debts, and profits at its insurance arm were almost wiped out as injury claims soared.
Hester said Citizens remained a core businesses.
RBS Insurance, Britain's largest car insurer, is among the assets the bank will have to sell over the next four years as part of a deal with EU regulators over state aid.
The bank said the rise in claims, blamed on lawyers and management distractions, would be controlled by next year and would not affect the sale. RBS expects a flotation towards the end of the four year period allowed for its disposals.
Hester said there had been interest in the other assets it is required to sell, but no deals were imminent.
"The telephones are ringing, but don't expect anything soon. You should expect it to take at least a year before the first of these businesses goes anywhere," he said.
RIGHTS ISSUE?
Asked whether RBS was still considering a rights issue to repay some of the government's B shares and therefore reduce its stake, Hester said: "We will look carefully at investor appetite and at market prices and remain open at any time to ways of reducing the government stake."
(Editing by Greg Mahlich and Andrew Callus)
