RBS shares jumped over 5% on Monday (February 20th) after it confirmed the EU is looking at alternatives to forcing the troubled lender to selling off around 300 Williams & Glyn brand branches.

This is good news for RBS and for chief executive Ross McEwan, whose efforts to set up Williams & Glyn as a standalone bank failed badly and at huge cost. A provision of £750m will be included in its annual results this week. It’s already cost a lot more than that – the failed IT project alone cost £1.5bn.

But ahead of its annual results we should see this development in context. It is good news as the sale of those branches was a prerequisite for the bank to move forward. Morgan Stanely reckons it could add 10% to profits by 2019, although there will be further charges as RBS reintegrates these branches into its network.

But a looming $13bn fine for mis-selling residential mortgage backed securities in the US remains. RBS has so far set aside over $8bn to cover the cost but this could rise significantly, perhaps delaying profits by another year. The total fine is expected to be more than $8bn and the bank warned that ‘further substantial additional provisions and costs may be recognised and, depending on the final outcome, other adverse consequences may occur’.

If the Department of Justice agrees to anything less than $10bn there will be cheers all round for RBS executives and profits could feasibly return – as McEwan hopes – by 2018.

For now it’s focused on costs and around £800m in savings annually over two years. But just how sustainable it is to continue slicing away is a doubt – the bank has already cut costs at a rate of roughly £1bn a year for the last three and shed around a third of posts since 2013. Underlying performance could be hit by continued cuts.

The mood is more positive than it has been for some time. Deutsche Bank recently upgraded its view from sell to hold, while Barclays has also upgraded the stock to equal-weight. The core business remains very profitable – around a £1bn a quarter – but legacy issues are so far very hard to shake and a loss of up to £6bn for 2016 is expected, while there is little to no hope of profits this year. This will mean losses over nine years of nearly £60bn.

RBS share price action 12 months

RBS_Feb20th2017

The stock is up 50% from its low of last summer, but it is significantly underperforming the rest of British banking sector. FTSE banks are up roughly 45% over the last year while RBS is trading a touch lower than where it was this time last year. It was last trading at 256p - RBS shares have scaled this level four times before in the last 12 months (in Feb, Apr, May and Jun) but each time failed to sustain the momentum and retreated. That suggests upside from here is limited unless the earnings defy the gloomy expectations. It’s hard to see what RBS can muster short term other than more cost cutting and just keep its fingers crossed that US fines are not as bad as feared.

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