More progress, but no update on the DoJ investigation and the spectre of GRG still leaves a question mark over whether the bank really can return to profitability next year. Shares have risen 60% in the last year as RBS has begun to show profits, but if investors get a whiff that profits are not coming next year they may lose patience.

Following the Q1 results we noted how RBS may have finally turned a corner and believed Q2 cemented this view. Q3 shows further progress towards health and sustainable profits. But as then we must urge caution around the investigation into mortgage backed securities by the Department of Justice. RBS earmarked about £6.6bn for that so far but this might need a little more. RBS has said that ‘further substantial provisions and costs may be recognised’.

Whatever else it needs to set aside may well eat up all the profits it makes in 2017. So far it has generated an attributable profit of £1.33bn for the year to date, which could easily be needed to up provisions for a penalty that is expected to be in excess of the $7.2bn Deutsche Bank was fined for similar misdemeanours, and could be as much as $12bn.

RBS knows this threat to profits and remains realistic, saying that returning to profit next year remains ‘subject to any further provisions for the investigations of the US Department of Justice into the Group's historic RMBS related activities being substantially taken in 2017’.

Meanwhile there remain other significant legacy issues, particularly over RBS’s treatment of SMEs after the crisis. RBS could face further action from the regulator.

Pre-tax profits rose to £871 million, from £255m a year before, while RBS made an attributable profit of £392 million, from a loss of £469m in the same quarter a year before. The adjusted operating profit number of £1.245bn easily beat expectations but was lower than a year before due to increased losses in Capital Resolution, where RWAs fell £3.5bn. (RBS plans to wind up Capital Resolution during Q4 2017 and transfer the remaining assets to the core bank.) On both fronts profits were softer than the preceding quarter. Partly this looks down to softening in investment banking with the NatWest Markets adjusted income of £401 million 23.8% lower than Q3 2016.

Really this looks a positive continuation of what was evidenced in H1. Heavy cost cutting is working on the bottom line while fewer conduct charges helps too. At £125m for the quarter conduct charges were significantly lower than the £425m in Q3 2016.

The axe is still chopping away at costs - adjusted operating expenses have reduced by £708 million for the year to date, making it on track to achieve the £750m target for the year. RBS is aiming to cut costs by £2bn over 4 years.

As previously noted, there remains a question mark over how sustainable it is to continue in this fashion. RBS has cut costs at roughly £1bn a year for the last three years, whilst shedding a third of posts since 2013. Cutting out the fat and around the margins is fine but eating into the core business is a risk but one that is working for now. A chronic lack of profits in the last nine years has hurt RBS’s ability to invest in new platforms and IT.

Cost cutting is not free but restructuring costs are about half what they were a year before, suggesting that RBS has done much of the hard work already.

Key numbers present a mixed picture. The CET1 ratio is better than expected – this increased by 70 basis points in the quarter to 15.5% (15.3% expected) reflecting a reduction risk weighted assets, which were down by £10bn across the bank. Return on tangible equity was 4.5% for the quarter, and 5.2% for the year to date. Net interest margin was softer and fell one basis point from the last quarter to 2.12%.

or LOGIN as existing customer


Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and ETX Capital accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.