Royal Bank of Scotland (RBS), the state-backed UK bank, reported a pre-tax loss of 1.4 billion pounds ($2.3 billion) on Friday, as charges for own credit adjustments—accounting requirements for credit spreads—hit the bank.
RBS’s group operating profit for the first three months of 2012 was a better-than-expected 1.2 billion pounds, compared with a loss of 144 million pounds in the previous quarter as it set aside losses for payment protection insurance, and a profit of 1.1 billion at the same time in 2011. The improvement in its profits was driven by better results in its markets division as stock markets recovered from 2011’s volatility.
The charges faced by RBS in the most recent quarter stem from the fact that RBS debt now costs more as its credit improves, so the assumed cost of buying it back is higher.
The bank, which is 82 percent owned by the UK government, confirmed that it has as good as repaid the 163-billion-pound bailout loan from the UK and the U.S., and will start paying discretionary coupons and dividend payments on hybrid capital instruments, after two years of not paying them.
“Our number one objective is the safety and soundness agenda. We’re working on the balance sheet, shrinking it and using proceeds to pay down wholesale funding so we get to a more sustainable financial position,” Bruce Van Saun, finance director of RBS, told “Squawk Box Europe.”
RBS’s share price has risen by around 20 percent this year as speculation about whether the UK government will sell part of its stake to investors from the Middle East has grown.
“The government owns the stock, and it’s up to them to decide when they want to sell—we just focus on making this company as investable as possible,” Van Saun said.
“Everybody’s frustrated with the low growth environment that we’re in. Many companies are still a bit concerned and lacking in confidence so the demand for loans isn’t what it might be.”
Chief Executive Stephen Hester, who had to forgo his 2011 bonus amid a row about executive pay, said in a statement he was “happy” with the bank’s progress.
RBS’s core Tier 1 ratio rose slightly over the quarter to 10.8 percent, as the bank prepared for Basel III rules coming in January 2013. Van Saun warned that the new rules could affect future profits.
“To run a safer banking system there will be additional costs on banks' balance sheets but we’ll have to figure out how to become more efficient and wait for more recovery, plus potentially pass on some of that cost to our customers,” he said.