RBS revival on track despite Irish turmoil

RBS has finally returned to operating profit, generating £2.01bn versus a loss of £6.23bn last year and meeting or overshooting most of chief executive Stephen Hester’s targets for his five-year recovery plan.

However, the bank is still losing money overall to the tune of £239m pre-tax and £1.23bn after tax. It has been hit particularly hard by its exposure to Irish real estate: RBS’s Ulster Bank lost £761m in operating costs and the bank has an undetermined amount of additional exposure in its “non-core” assets.

Ireland’s turmoil has caused impairments in commercial real estate to continue their rise, bucking the improving trend in the UK, so that the sector lost Ulster Bank £4.31bn last year, up 30 per cent on 2009. Its 2010 returns on equity (RoE) were also worse: its value dropped 21 per cent, nearly double 2009’s 11.7 per cent fall.

Ulster’s dismal performance forced Hester to admit that the bank still has a “long road” to travel, saying: “We lent a lot of money against real estate in Ireland that we shouldn’t have done.”

He emphasised that scaling down RBS’s unwieldy balance sheet is a top priority, revising his 2011 target for the size of its non-core assets from £118bn to £96bn.

Along these lines, the results showed that RBS’s loans-to-deposit ratio has improved, reflecting an effort to lend from customer deposits, which are currently considered more stable than wholesale funding. Fifty-eight per cent of the bank’s funding is now from deposits, versus 51 per cent a year ago; 33 per cent is from wholesale.

And Hester has set a return on equity target of 15 per cent, which was beaten by the investment banking division last year. It returned 17 per cent and brought in £3.5bn in operating profit.