RBS back in the black - by the skin of its teeth

Profitable for the first time since 2007, things are looking up for state-owned RBS. But only a bit.

Last Updated: 31 Aug 2010

The slow process of rehabilitating RBS seems to be on track: the bank said today that it made a net profit of £9m in the first half of 2010, the first time it’s been in the black for three years (albeit by an amount that’s pretty much a rounding error for an organisation with revenues of £16bn during the period). In many ways, we should be pleased – the quicker it recovers, the better-equipped it is to support the recovery and the quicker we can sell our 84%. But returning to the black doesn't necessarily make CEO Stephen Hester’s rebuilding job any easier…
RBS actually reported a pre-tax operating profit of £1.1bn for the period, which you’ll be pleased to hear is 77 times as much as the equivalent figure from last year (the advantage of having minuscule profit numbers – it does flatter comparisons next time round). But apparently this is due to accounting technicalities so boring that not even Robert Peston can get excited about them: Hester said the more representative number was that £9m net profit.
That’s undeniably a big improvement on the £1bn net loss in the first half of 2009. As per all the other banks, it reflects a healthy contribution from its investment banking arm, an increase in its net margin (i.e. the difference between its cost of money and its loan rates) and a big drop in bad loans – down by a third to just over £5bn.
But Hester shouldn’t expect pats on the back; if anything, this could make his life more difficult. For a start, it makes the argument for sacking more people – aka continuing his essential five-year restructuring plan – a lot more complicated. 23,000 jobs have already gone, including 17,000 in the UK, but this kind of thing is a lot easier to justify when you’re loss-making. It’ll also mean extra criticism about the fact that its overall lending actually fell by 3% to £14.4bn, despite Government pressure (though RBS argues that it’s lending more to SMEs, and the demand just isn’t there). And there’ll be anger about the fact that it’s making a higher margin on its loans, since that basically amounts to charging us all more to borrow.
At the same time, RBS faces plenty of competitive threats. The investment banking arm, its big profit engine, saw revenues and profits drop by about a third in the second quarter (and the Government may yet force it to spin the division off). Its high street presence has also been weakened by the forced sale of those 300-odd branches to Santander (and there may be more sell-offs to come, if this doesn’t shrink its market share to the required extent). And in its core business, the cost of bad loans actually remained pretty flat.

So Hester still has plenty of work to do to restore RBS to full health. Still: so far, so good.

In today's bulletin:
RBS back in the black - by the skin of its teeth
Cadbury boosts Kraft - but is the reverse true?
GM raises the stakes with 'lifetime warranty' on new cars
Editor's blog: The difficulties of mega-philanthropy
One-in, One-out: Government promises no more red tape

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