Royal Bank of Scotland Group Plc signaled it’s in a better position to handle its remaining legacy issues after posting stronger than expected capital ratios in the third quarter. The shares rose.
The Edinburgh-based lender’s common equity Tier 1, a measure of financial resilience, jumped to 15.5 percent in the period from 14.8 percent at the end of June, it said in a statement on Friday. That beat analyst estimates.
“Our core bank continues to generate strong profits and we remain on track to hit our financial targets,” Chief Executive Officer Ross McEwan said in the statement.
Four years into his tenure, McEwan is making headway in turning around the recipient of the biggest banking bailout during the financial crisis. But, the firm is still hampered by legacy misconduct charges and needs to settle with the U.S. Department of Justice over its mortgage-bond probe before it can return dividends and entice investors to buy the government’s 71 percent stake. The CEO told reporters on a call on Friday that he is “optimistic” of a DOJ settlement this fiscal year.
The lender’s strong capital generation “provides another layer of insulation,” Morgan Stanley analysts wrote in a note to clients. The shares climbed 2.2 percent to 287.1 pence at 8:11 a.m. in London trading.
RBS has said that it would plan to pay dividends, once uncertainty over legacy issues had been removed. The bank, whose shares are up 28 percent this year, reiterated that it will be profitable in 2018.
McEwan made some steps forward in the bank’s return to normality this year, with an agreement in July to pay $5.5 billion to the U.S. Federal Housing Finance Agency to settle a lawsuit alleging RBS sold faulty mortgage bonds to Fannie Mae and Freddie Mac from 2005 to 2007. RBS has also gained approval from the European Union for an alternative plan to boost competition after failing to sell its Williams & Glyn unit, a condition of its 2008 bailout.
The bank’s adjusted operating profit, which excludes certain one-time items, fell 6 percent to about 1.25 billion pounds ($1.64 billion) from 1.33 billion pounds in the same period a year earlier. That beat an approximate 1.04 billion-pound estimate of four analysts surveyed by Bloomberg News.
RBS, which has focused more on mortgage lending than unsecured consumer credit said its net interest margin declined to 2.12 percent in the quarter from 2.17 percent a year earlier. Its Natwest Markets unit, which houses the trading business, posted a 24 percent drop in revenue to 401 million pounds in the quarter compared to a year ago. The previous period had benefited from higher client activity and “favorable market conditions” following Brexit, it said.
— With assistance by Stephen Morris