The FTSE 100 bank ended a week of reports for Britain’s biggest financial institutions by reporting an attributable profit of £392m over the third quarter compared with a loss of £469m the year before. Profits year-to-date are hovering around £1.3bn.
Early Friday morning, RBS’s shares were up 3% to £2.89p.
Whether RBS can break its 10-year streak of no profits hinges heavily on the timing and size of the fine that is coming from the US Department of Justice (DOJ), said Laith Khalaf, senior analyst at Hargreaves Lansdown.
But “the fact the bank has said it expects to be profitable next year suggests RBS is bracing for a pretty imminent rap on the knuckles”, he said. “The large and unpredictable nature of this liability looms large over RBS, and could hamper its ability to pass the Bank of England’s 2017 stress test.”
There were several positive takeaways from the bank’s latest update, however.
Its core business remained in good shape, with income increasing by 5.6% in the third quarter. The bank has also managed to settle a number of legacy issues, including a £4.2bn fine with the US Federal Housing Finance Agency.
Like peer Barclays, RBS was also able to close the chapter on its “bad bank” Capital Resolution division, which was set-up with the purpose of offloading its stockpile of unwanted assets post-financial crisis.
Still, the bank has to contend with “one large obstacle” – the government’s 71% stake in the group, noted Khalaf.
“The presence of such a large seller will put downward pressure on the share price, irrespective of the bank’s results.
“We may get more details on the Chancellor’s plans for RBS in the forthcoming Budget, but with political capital quite thin on the ground at the moment, this battle might be left for another day.”
Ian Forrest, investment research analyst at The Share Centre, said investors can take comfort in the fact that the bank expects to achieve full-year profitability by next year, but agreed the DOJ fine and large government stake are reasons to be wary of the stock for now.
“We would still suggest that investors avoid the stock, as there are better opportunities to be had in the market. For investors interested in this sector, our preference is HSBC as it has remained a significant payer in difficult times and now there are clear indications that the group is starting to benefit from its restructuring programme.”
