Enlarge imageBy Clara Ferreira-Marques and Steve Slater
LONDON (Reuters) - Royal Bank of Scotland more than halved third-quarter losses as bad debts shrank in results released on Friday and its shares rose over 7.5 percent.
Investors nevertheless fretted over a poor performance at its investment banking arm, which trailed European and U.S. rivals.
Part-nationalised RBS, which earlier this week agreed to a further cash injection from the government and drastic asset disposals, said investment banking profits shrank to 375 million pounds from 1.1 billion in the second quarter, hit by impairments and an easing of favourable conditions that had propped up performance in the first half.
RBS, 84 percent state-owned as a result of Tuesday's deal with the government, said impairment losses, which have wiped out profits so far this year, shrank 30 percent to 3.3 billion pounds and 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 pounds in Q2.
But it 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.
"I have repeatedly said this is a marathon, not a sprint, and so it is proving," Chief Executive Stephen Hester said of the banks' performance over the past three months.
News of lower losses and a modestly positive outlook on bad debts provided some relief for investors, sending the shares up over 7.5 percent. At 10:30 a.m., the stock was up 7.55 percent at 37.88p, one of the FTSE 100's top gainers.
"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 cycle and the impact on capital."
RWAs increased by 9 percent, cutting the bank's core tier 1 to 5.5 percent. Including the impact of Tuesday's deal, however, that rose to 11.1 percent proforma.
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 impairments and more "normalised" trading conditions dented profits at its own global banking and markets division.
Operating profit at the unit, slapped earlier this week with drastic EU-imposed restrictions on bonuses and on performance in its key debt market, was hit by falling currency, commodity and equities income. Impairments were swollen by a "large individual failure" and 320 million pounds in losses on the value of its own debt.
Analysts have highlighted concerns for the bank's GBM arm, which after Tuesday's government deal has been ordered not to rise above number five in the global all-debt markets league table for three years, as well as agreeing to cap cash bonuses -- morale-sapping decisions that could make it harder to retain staff.
Hester said the decision would make it harder to turn round the bank, one of the top recipients of bailout funds.
"We are treading a very delicate tightrope," he said.
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 it would take its time with the sale, and currently expects a flotation towards the end of the four year period allowed for the sales.
There had been interest in the other assets required for sale, but no deals were imminent, Hester said.
"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.
The deal with the UK government and EU authorities earlier this week saw RBS secure a further 25.5 billion-pound capital injection from the government and more flexible terms for a government-sponsored insurance scheme for bad debts.
RBS has said it would consider a rights issue to refinance part of the government's extra investment.
(Editing by Greg Mahlich and Andrew Callus)
