RBS reports £1.6bn profits but warns of tough year ahead

Royal Bank of Scotland (RBS) has reported pre-tax profits of £1.6bn for the three months to the end of March, almost double the profit recorded in the same quarter a year earlier.

But the bank warned it faced a "tough year" ahead as it continued to deal with the cost of restructuring the business and expected regulatory fines.

The results mark a return to profit for the first time since last summer

But RBS expects more fines and damages for mortgage mis-selling in the US.

Operating profit was £1.5bn, up from £747m a year earlier, the bank added.

Shares in RBS soared 10%, or 31.10p, to 337.70p in early trading on the London Stock Exchange.

RBS chief executive Ross McEwan said the results showed the bank was in a "steady state".

He promised RBS would be a bank "that does a great job for customers while delivering good returns for our shareholders".

"But we still have a lot of work to do and plenty of issues from the past to reckon with," he added.

Expected losses

Underlying profit at the bank stood at £1.2bn in the quarter, three times higher than a year earlier and as much as six times higher than the £200m to £300m range City analysts had forecast.

But the bank - which remains 80% taxpayer-owned - cautioned that it still expected to make a loss for the year despite the profit in the first quarter.

Aside from fines from legacy issues, the bank expects considerable costs from restructuring as it slims down from seven divisions to three.

The bank added its results benefitted from its decision in November to hive off toxic assets into a bad bank at a cost of £4.5bn, which led to lower impairment charges, particularly at Ulster Bank.

But the bank also benefitted from better cost control. It reported a cost-to-income ratio of 66%, down from 73% a year earlier. The bank is aiming to reduce the ratio to 55% by 2017 and 50% in 2020.

The year ahead is still likely to be dogged by fines relating to legacy issues, particularly from abroad.

In its annual results, RBS made a £1.9bn provision for fines and damages relating to mis-selling mortgage bonds in the US, as well as other penalties relating to market manipulation. But the bank fears the fines could exceed this amount.

RBS is among several major banks assisting regulators around the world investigating allegations of collusion and price-rigging in the global currency market.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said the bank's results appeared to "represent the calm before the storm."

He added: "The bank is still in the midst of dealing with its legacy issues, and has warned that there will be a considerable rise in costs as the year progresses, driven both by the restructure and the possibility of further regulatory fines.

"RBS is pursuing a similar route to Lloyds in preparing to simplify and focus its operations, but Lloyds is much further down the road."

Dividends

In April, RBS agreed with the Treasury to cancel a deal which stopped it paying dividends to private shareholders.

The deal was seen as a first step towards privatisation.

The bank said it would seek permission from its shareholders at its annual general meeting (AGM) on 28 June to pay £1.5bn to cancel the so-called dividend access share (DAS) - £320m of it this year, and the rest by the beginning of 2016.

The block on dividend payments to private investors was created in 2009 when the government bailed out the bank for a second time at a cost to the taxpayer of £25.5bn - taking the total cost of the RBS bailout to £45.5bn.