LONDON – Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, swung into profit for the first time since 2007 as it cut bad-loan provisions and writedowns on credit market investments.
Net income was 9 million pounds ($14 million) in the first six months of the year, compared with a loss of 1.04 billion pounds a year earlier, the Edinburgh-based bank said in a statement. That beat the 47 million pound loss that was the median estimate of six analysts in a Bloomberg survey.
“RBS wasn’t just the U.K.’s worst bank, they were the world’s worst bank,” said Ralph Silva, a strategist at London-based Silva Research Network, which provides research to financial companies. “So any return to profitability should be applauded.”
RBS joins rivals including Europe’s biggest bank, HSBC Holdings Plc, Lloyds Banking Group Plc, Deutsche Bank AG, Germany’s biggest lender, and BNP Paribas SA in reporting falling bad-loan provisions. RBS last reported a profit at the end of 2007, after which it needed 45.5 billion pounds of taxpayer-supplied capital during 2008 and 2009, in the world’s biggest bank bailout.
The bank set aside 2.36 billion pounds less for souring loans in the first half of 2010, a 31 percent decline compared with a year earlier. RBS was also helped by falling trading losses on investments including asset-backed products, “credit exotics” and assets covered by monoline insurers, which were cut by about 97 percent over the same period, it said.
The bank gained 2.4 percent to 53.25 pence at 12:01 p.m. in London trading, for a market value of 58 billion pounds, the third-biggest gain in the 54-member Bloomberg Europe Banks and Financial Services Index.
“We are not trying to be triumphalist, we are not trying to get ahead of ourselves,” CEO Stephen Hester said during a conference call with journalists Friday. “We do think there is lots of work to do and that progress will not be linear.”
Net interest income rose to 7.22 billion pounds from 6.86 billion pounds as margins widened.
“Everybody knows that bad debts are high and are coming down, but it’s now about margins,” said Bruce Packard, an analyst at Seymour Pierce in London, who has a “sell” rating on the stock. “What people want to know is whether banks can raise their prices.”
Total operating profit at the so-called core units, those the bank plans to keep, fell by 26 percent to 4.47 billion pounds. The operating loss at the “non-core” division narrowed to 2.88 billion pounds from a loss of 9.36 billion pounds.
Operating profit after impairments at the core U.K. consumer and commercial units increased to 1.12 billion pounds from 443 million pounds, while it dropped 44 percent to 2.55 billion pounds at the securities unit.
RBS, 83 percent government owned, posted losses of 26 billion pounds in 2008 and 2009, meaning the bank was on average losing about 36 million pounds a day during that two-year period.
“RBS has brought the half-year reporting season to a close in quietly confident fashion,” said Richard Hunter, Head of UK Equities at Hargreaves Lansdown Stockbrokers. “The themes it described are similar to its competitors this week, most notably a marked improvement in the impairment situation, coupled with a more challenging environment in investment banking.”
Hester said that he is “cautious” on the outlook for the investment bank in the second half of the year. After a slowdown in May and June because of the sovereign debt crisis, he said there had been no pick up in July.
“In terms of clients, we haven’t yet seen an improvement and we are getting into the quiet times of August,” Hester said. “If clients are uncertain and sit on their hands, you make less money in investment banking.”
The U.K. government had about a 3 billion pound profit on its investment in RBS at the close of trading yesterday. The stake will not be sold before next year’s report on the case for separating retail and investment banks, the government has said.
RBS said total assets climbed 4 percent to 1.52 trillion pounds, meaning that the bank’s balance sheet is larger than the U.K.’s gross domestic product.
