30th Jul 2015 10:45
LONDON (Alliance News) - Royal Bank of Scotland Group PLC said Thursday it doesn't expect to return capital to shareholders until at least 2017 and warned of a "noisy" year ahead after posting a surprise net profit in the second quarter.
Chief Executive Ross McEwan told journalists he intends to go "further and faster" with the state-backed bank's strategy, as RBS continues to run down businesses and assets it no longer wants or needs, resolves the legal and regulatory issues over its past conduct, and improves the performance of the businesses it wants to keep.
McEwan warned that it will be a "noisy year" as the bank continues to restructure and deal with the consequences of its past conduct.
RBS is now concentrating on lending to customers in the UK and the Republic of Ireland, and in February said it no longer intended to operate a standalone investment bank.
The scale of restructuring required since the global financial crisis of 2007-09 forced RBS to accept a GBP45.5 billion bailout from the UK government means it has been unable to record an annual profit since 2007. The government is now looking to begin selling its 80% stake in the bank in the coming months.
The bank said it made a GBP293 million net profit in the three months to the end of June, compared with GBP230 million in the corresponding quarter the prior year, whereas analysts had forecast a net loss of GBP259 million.
Its common equity tier one ratio, a key measure of financial strength, increased to 12.3% from 11.5% during the quarter, and RBS said it will pursue in the coming days an issuance of additional tier one securities that convert into equity in the event the CET1 ratio falls below 7.0%.
Although the bank's capital position improved in the quarter, RBS doesn't expect to return capital, either through share buybacks or dividends, until the opening quarter of 2017. RBS said it wants to achieve sustained profitability, improve its performance in stress tests conducted by central banks, and get through its major conduct and litigation woes.
Restructuring costs increased to GBP1.05 billion from GBP385 million as the process "accelerated". Litigation and conduct costs amounted to GBP459 million in the second quarter, compared with GBP250 million in the corresponding quarter last year, primarily taken in connection with litigation in the US over residential mortgage-backed securities issued before the financial crisis.
In a conference call with journalists, McEwan and Chief Financial Officer Ewen Stevenson said the bank is not currently in settlement discussions over the matter.
Chairman Philip Hampton, who will be succeeded by Phoenix Group Holdings' Howard Davies at the start of September, said the bank still has obstacles in the UK, where authorities are investigating the way it dealt with distressed business customers.
"Past experience at RBS and many other banks has demonstrated the readiness of regulators to impose substantial fines and costly redress schemes. These conduct and litigation costs have greatly exceeded the expectations of banks and their investors. Judging the ultimate scale of conduct costs remains extremely challenging," Hampton said in a statement.
McEwan told journalists that the bank's remaining legal and regulatory worries, namely the residential mortgage-backed securities litigation and a stress test later this year, does not hamper the government's plan to begin selling its stake.
"What you've seen is the government's desire to exit, to start the sell down, which is probably positive from our perspective that they think the bank is in much better shape," McEwan said.
The chief executive's restructuring of RBS took another step forward earlier this week, when RBS said it was raising USD2.24 billion by selling another 16% stake in US retail bank Citizens Financial Group Inc, and the bank expects to complete the divestment of its remaining 20% stake by the end of 2015.
That sale, which is taking place alongside restructuring in the investment banking division and the RBS Capital Resolution division that hosts unwanted assets, will help the bank to cut risk-weighted assets to below GBP300 billion this year. RWAs fell to GBP326 billion from GBP356 billion during the first six months of the year.
RBS shares were up 1.0% at 356.80 pence on Thursday morning in London.
By Samuel Agini; [email protected]; @samuelagini
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