LONDON--Royal Bank of Scotland Group PLC (RBS) Chief Executive Stephen
Hester on Friday hailed the progress the bank is making in slimming
down its balance sheet but warned that the threat of protracted legal
issues related to the alleged fixing of interbank lending rates still
hangs over the lender.
The part-government-owned bank reported a net loss of GBP1.99 billion,
wider than the loss of GBP1.43 billion a year eariler. However, the
result was hit by a GBP3 billion accounting charge for the fair value
of the company's debt and a number of provisions for misselling
financial products.
Analysts focused on the more-positive underlying figures for the half,
helping to make its shares the leading gainer on the FTSE 100.
Excluding the own-debt charge, RBS would have posted a net profit of
GBP287 million. It posted an operating profit of GBP1.83 billion, down
from the GBP1.97 billion a year earlier.
Nevertheless, RBS warned that it faces a slew of lawsuits. The bank is
cooperating with regulators in the U.S., Japan and the U.K. who are
probing whether banks colluded to try and rig benchmark rates
including the London Interbank Offered Rate. RBS said that it had
fired a number of traders following the investigations but said it was
too early to estimate the fines the bank may have to pay.
"The Libor situation is on our agenda and is a stark reminder of the
damage that individual wrongdoing and inadequate systems and controls
can have in terms of financial and reputational impact," CEO Hester
said.
RBS said revenue in the first six months of the year fell to GBP11.26
billion from GBP15.29 billion the year before, as the bank continued
to cut its balance sheet in an attempt to return to profitability.
"Despite the tougher economy, these results show our ongoing
businesses to be more resilient than before with many further
improvements underway," Mr. Hester said.
The lender said that it expects impairment charges from its Northern
Irish unit to remain "elevated" but the bank was on track to clean up
its balance sheet.
RBs' results were hit by a series of charges. The bank put aside
GBP125 million to compensate customers after the bank's computer
systems failed in June, a debacle that left millions of clients
without access to their accounts. Mr. Hester said the provision didn't
included a potential fine from the U.K. financial regulator and that
no one had been fired in relation with the matter. The bank also put
aside an extra GBP135 million to cover the misselling of payment
protection insurance.
Since its government bailout amid the financial crisis three years
ago, Mr. Hester has led RBS through an intensive restructuring plan,
drastically reducing its balance sheet and selling off or winding down
many businesses designated as "non-core." The goal is to make the bank
smaller, safer and get the government a return on its investment.
On Friday, the bank said non-core assets were cut by GBP22 billion to
GBP72 billion in the first half.
By the end of the year, the bank could exit the government's
"asset-protection scheme," under which RBS pays the state a fee to
insure it against losses on certain assets. If regulators deem it safe
for RBS to exit this insurance scheme, it would boost the bank's
image, analysts say.
On Friday, RBS said it will make an announcement regarding exit from
the scheme once formal regulatory clearance has been secured. In 2008,
the government invested GBP45.5 billion into the bank at an average
buy-in price of around 50 pence a share. On Friday, following an
earlier reverse stock split, RBS shares were at roughly half that
amount. Mr. Hester played down rumors that the government would want
to fully nationalize the lender. "No one has talked to me about it,"
he said.
The accounting charge on own debt has become a regular feature of the
banking sector. When the value of a bank's debt rises on the market
during a strong quarter, the bank is required to take a loss, as it
would theoretically cost more to repurchase that debt. Conversely,
during weak quarters, banks can book a profit as the debt becomes
cheaper.
Analysts generally hailed the progress RBS has made to adjust to the
new environment and regulatory requirements. "Given all of the
distractions, the fact that RBS continues to edge in the right
direction at all is of some comfort to investors," Richard Hunter at
Hargreaves Lansdown said.
"While MPs and regulators focus their energies on sound-bites and
gesture-politics, RBS management continues to make useful progress in
terms of balance-sheet repair," Ian Gordan of Investec said.
RBS said its Core Tier 1 ratio, a key indicator of a bank's health,
was 11.1%, up from 10.6% as the end of the year.
-Write to Max Colchester at max.colchester@wsj.com
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(END) Dow Jones Newswires
August 03, 2012 03:15 ET (07:15 GMT)
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