(Adds further CEO comment and detail.)
By Patricia Kowsmann
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Royal Bank of Scotland Group PLC (RBS), which is about to see its government ownership rise to 84%, on Friday said it continued to be hit by high bad-debt charges in the third quarter, but said the figure may have stabilized and it insisted it is making progress on its long "journey" to independence.
The U.K. bank reported impairment losses of GBP3.28 billion for the three months ended Sept. 30, up from GBP1.28 billion a year earlier but down from GBP4.66 billion in the second quarter.
So far this year, bad-debt charges have reached GBP10.8 billion, up from GBP2.76 billion a year earlier.
"Although we are not predicting [charges to continue falling] in the near term, we do see bad-debts as having plateau, and in a few quarters' time we believe that the next move will be downwards from the plateau that we are on," Chief Executive Stephen Hester said.
Overall, RBS swung to a third-quarter attributable net loss of GBP1.8 billion from a net profit of GBP871 million a year earlier. The net loss was wider than the GBP140 million loss posted in the second quarter, when it recorded a GBP3.79 billion gain on the redemption of its own debt.
Under accounting rules, banks can book non-cash gains when the value of their debt falls, as it theoretically needs less money to buy back its own debt.
On an operating level, RBS posted a loss for the three months of GBP1.53 billion, narrower than GBP3.53 billion it posted in the second quarter.
Since the financial crisis, analysts often pay close attention to quarter-on-quarter changes, instead of year-on-year, as year-ago figures often don't reflect the current environment.
"Our core businesses are almost all now performing as we expected them to, which in itself is a minor miracle, as we face all the pressures and difficulties," Hester said.
"Profitability in our core businesses will recover fully only when our own actions are also complemented by more normal interest rates and bad debt experience," he added.
In a conference call, Hester said he hopes RBS will be profitable in 2011. Next year, however, it still expects losses from its non-core division--which has been earmarked for disposal--to outweigh the expected profit in its core operations.
"The results also show the headwinds we face and the legacy we are purposefully working out of," he said in a statement. "As I have repeatedly said, the journey will take some years."
On balance, analysts and investors took RBS' comments as good news. At 1052 GMT, shares were up 3 pence, or 7.4%, at 38 pence.
"Overall, the third-quarter trading update didn't provide big surprises, as expected, but the improvement in both margins and impairments show things are improving slightly for them," an analyst said.
RBS is about to embark in a massive restructuring--including big asset sales--ordered by the European Union, as the U.K. government pumps an extra GBP25.5 billion into the bank through an scheme to insure GBP280 billion in toxic assets.
Last year, RBS received GBP20 billion in state money, after it fell into disarray when the financial crisis intensified and revealed deep problems in the ABN Amro businesses it had acquired in an ill-timed acquisition, late in 2007.
In exchange for the government aid, RBS will now have to shed businesses over the next four years, as the EU seeks to make sure the bank isn't at a competitive advantage over peers that stayed independent.
The EU's demands come at a time banks are reporting more robust earnings following a year of shaky results.
On Friday, RBS said the fall in impairments in the third quarter from the second were helped by a recovery in its U.K. retail and corporate businesses.
It, however, said impairments rose at its U.S. retail bank unit, Citizens. Hester reiterated that the business isn't currently for sale.
The bank's global banking and markets divisions have also been hit by rising impairment charges and "more normalized" revenue levels after sharp increases due to market volatility.
The bank said net interest margins--the difference between interest earned on loans and paid on deposits--are showing signs of stabilizing. The margin was at 1.75% in the quarter, compared with 1.70% in the second and 2.05% in the third quarter of last year.
RBS will provide an earnings update for 2009 and more details of its restructuring plan with the EU in February.
Over the next four years, the bank will have to sell off its insurance arm--probably through an initial public offering--and divest its global merchant services unit and its interest in commodities trading joint-venture RBS Sempra Commodities, collectively accounting for GBP5.7 billion of RBS' GBP26.9 billion revenue in 2008.
In addition, it will sell branches operating under the RBS brand in England and Wales, its NatWest branches in Scotland, and the accounts of some small and medium business customers across the U.K., totaling about 2 million customers and GBP20 billion in assets.
Hester said Friday that he expects the insurance business to be disposed of later in the timeframe given, while the other assets will be sold "faster."
However, "Don't expect anything soon. You should expect it to take at least a year before the first of these businesses go anywhere," he added.
He also reiterated that although the bank is participating in the government's asset protection scheme, it doesn't expect to tap on the insurance, as economic conditions continue to improve.
Nonetheless, Hester said more job cuts are underway. He has cut about 16,000 jobs since taking over the CEO position in October 2008, and indicated that is more than half of the total expected. The bank has about 165,000 employees.
-By Patricia Kowsmann, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com
Order free Annual Report for The Royal Bank of Scotland Grp.
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Order free Annual Report for The Royal Bank of Scotland Grp.
Visit http://djnweurope.ar.wilink.com/?ticker=GB0007547838 or call +44 (0)208 391 6028