Royal Bank of Scotland (RBS) trebled its profit in the first quarter, beating analysts' expectations and handing a boost to new Chief Executive Ross McEwan as he looks to turn around the government-controlled bank's fortunes.
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The bank reported a net profit of 1.2 billion pounds ($2 billion), up from 400 million the year before, benefiting from improved cost controls and a reduction in losses from bad loans.
The performance marked only the sixth occasion RBS has reported a quarterly profit since Britain pumped 45 billion pounds into the bank during the 2008 financial crisis, leaving it with an 81 percent shareholding, and contrasted with an 8.7 billion pound full-year loss in 2013.
Analysts had forecast a profit of 200 million pounds, according to a poll of eight analysts provided by the bank.
"Today's results show ... RBS will be a bank that does a great job for customers while delivering good returns for our shareholders," said McEwan, who took over from predecessor Stephen Hester last October.
However, McEwan added that RBS still has "a lot of work to do and plenty of issues from the past to reckon with".
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Its shares, which had fallen earlier this year to an eight- month low, jumped more than 12 percent to their highest since late February. But taxpayers are still sitting on a loss of 14 billion pounds on their holding, while banking and political sources say a return to full private ownership may take up to five years.
The results, which come a day after fellow bailed-out bank Lloyds <LLOY.L> also reported improved earnings, reflect the impact of RBS's decision last November to create an internal "bad bank", designed to fence off its riskiest assets and leaving the rest of the bank in a better position to lend.
The results also include no new charges for past misconduct,
such as the mis-sale of loan insurance in Britain and possible mis-selling of U.S. mortgages.
RBS had said in January it would take a 3 billion pounds charge in its 2013 results to cover the cost of these misdeeds, resulting in its top executives not receiving any bonuses for the past year.
McEwan said on Friday the bank did not intend to settle early with investors who claim they were misled over its 12 billion pound rights issue of new shares six years ago and are suing it for billions of pounds.
"We understand their issues, but we believe we have strong defenses to the claims and that is why we intend to defend these vigorously. That's the reason why these things will be set out in court rather than in an early settlement, we have a good defense on this," he said.
Hundreds of investors, including some of the bank's biggest institutional investors, claim they were misled by RBS over its massive 2008 rights issue, raising the prospect of a high-profile court battle next year. RBS said on Friday a further claim was filed in the High Court in London on April 28.
RBS is also among several major banks assisting regulators around the world investigating allegations of collusion and price-rigging in the global currency market. It said the timing and amounts of further settlements were uncertain.
The bank said an improvement in economic confidence in Britain had continued and it expected a modest increase over the rest of the year in its net interest margin, a key measure for banks which reflects the difference in the rates at which it lends and pays out to depositors.
"We believe the bank remains the best way to play the UK (economy) over the next two years. The first-quarter results confirm the underlying earnings power of the franchise," said analyst Chirantan Barua at brokerage Sanford Bernstein.
RBS said its Irish division Ulster Bank returned to profit for the first time in five years, swinging to an operating profit of 17 million pounds from a 1 billion pound loss in the fourth quarter as losses on bad loans tumbled.
McEwan said he wants to achieve economies of scale in Ireland and would be happy to work with other parties to achieve that. He said the bank would update on its plans in the summer.
RBS also said income from its investment bank is expected to be lower in the remainder of the year, in line with wider industry trends. RBS has shrunk its investment bank dramatically to satisfy lawmakers who want it to focus on lending to British households and businesses.
The bank's actions remain under scrutiny by lawmakers and the government last week blocked its plans to pay bonuses worth double an employee's fixed salary, saying this could not be justified while RBS remained a majority publicly-owned bank.
McEwan said the intervention will mainly affect people in its investment bank, its U.S. retail business Citizens and in its restructuring arm.
"I want to make sure we're in a position to pay those people so we can retain them for the value of this business," he said.
RBS said its core Tier 1 capital ratio - a key measure of a bank's financial strength - increased to 9.4 percent from 8.6 percent at the end of 2013 and it is on track to achieve its target of 11 percent by the end of 2015, and 12 percent or above by the end of 2016.
"All trends for this bank are going in the right direction, notably capital and impairments," said analyst Joseph Dickerson at brokerage Jefferies. "Further, RBS is generating decent underlying returns."