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£900m PPI claims see Royal Bank of Scotland swing to loss

RBS branch

PPI has hit profits at RBS

Royal Bank of Scotland slumped to an attributable loss of £315 million for the third quarter compared to a £448m profit for the same period last year as it suffered a surge in last minute claims on mis-sold payment protection insurance.

The bank was hit with a further £900m provision for PPI in the run up to the August deadline which turned last year’s operating profit of £961m into an operating loss before tax of £8 million.

For the first nine months of 2019, RBS reports an operating profit before tax of £2.7bn and an attributable profit of £1.7bn.

RBS’s bank’s net interest margin – the difference between the interest income generated by a bank and the amount paid out to lenders (a measure of underlying profitability) – fell to 1.97% from 2.02% in the previous quarter.

In the first hour of trading the bank’s shares fell 2.44% to 228.25p while the FTSE 100 was 52 points (0.72%) higher at 7,313.

Chief financial officer, Katie Murray, commented: “These results demonstrate our solid underlying performance in a tough operating environment. The core retail and commercial bank continues to perform well, and we are making good progress against our targets for the year.

“We have seen strong growth across the business and our sustained high levels of capital and liquidity mean we are well positioned to support our customers in these uncertain times.”

On a conference call she said that in relation to Brexit RBS has focused on “controlling the controllable” and that its preparations are in place.

The figures are the last reported under CEO Ross McEwan who leaves next week. RBS veteran Alison Rose takes over on 1 November and will become the first woman to lead one of Britain’s big four banks. She is expected to outline her new strategy in February.

Market reaction

Ed Monk, associate director from Fidelity Personal Investing’s share dealing service said: “There was no easy start for new RBS CEO Alison Rose with third quarter numbers today underlining the tough conditions for banks.

“Profits were all but wiped out by another £900m provision for PPI mis selling, and net interest margin was trimmed to just 1.97% as the flattening of the yield curve this summer left even less room for the bank to make money on lending.

“Earnings expectations were left unchanged, but previous ambitions for profitability in 2020 are now unlikely to be met. For investors, RBS may be attractive on value grounds and brokers have set elevated target prices for the shares, but the update today lays out the challenge in getting there.”

John Moore, senior investment manager at Brewin Dolphin, said: “The last set of results for RBS were a watershed moment for the bank, confirming it is on the road to redemption.

“Whilst this remains the case, today’s statement highlights the legacy issues that the bank, and many of its peers, still face – in particular, PPI claims have pushed RBS back to a loss.

“This will likely be temporary, but analysts will be more focused on the competitive pressures that led to the compression of RBS’s net interest rate margin. Away from the core retail bank operations, it was an especially tough quarter at NatWest Markets – where income dropped by nearly half.

“Despite these bumps on the road, RBS is a very different bank to what it once was and continues to make good progress on a path to recovery.”

AJ Bell investment director Russ Mould said Royal Bank of Scotland has seen the PPI figures blow a hole through the third quarter numbers.

“The £900m PPI provision was right at the top end of previous guidance pushing the company into a modest statutory loss – a long way short of the £700m plus forecast by analysts on this measure,” he said.

At least these results set a pretty low bar for incoming chief executive Alison Rose

– Russ Mould, AJ Bell

“While PPI will take the headlines, performance was disappointing across the board with income, costs and impairments all falling short of expectations.

“At least these results set a pretty low bar for incoming chief executive Alison Rose when she takes over at the beginning of next month.

“Her priorities are likely to include getting underperforming bits of the business like Ulster Bank and Natwest Markets back on track as well as paying out surplus capital.

“Probably the preferred method of doing so would be to start buying back shares from the Government to reduce the 62% stake, or if that proves too tricky perhaps further special dividends.”  

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