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RBS Operating Profit Drops 22% as Markets Revenue Declines

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Royal Bank of Scotland Group Plc, Britain’s biggest taxpayer-owned lender, said profit fell 22 per cent in the second quarter as revenue from its markets unit slipped amid the worsening European sovereign debt crisis.

Operating profit fell to GBP650 million (US$1 billion) from GBP833 million in the year-earlier period, RBS said in a statement today. That was in line with the GBP649 million median estimate of nine analysts surveyed by Bloomberg.

We have continued to make the bank safer and stronger as we clean up problems of the past,” Chief Executive Officer Stephen Hester, 51, said in the statement. “In a difficult moment for banks it is more essential than ever to drive through these changes.”

Hester has cut assets by more than GBP800 billion, eliminated 36,000 jobs and scaled back RBS’s securities and Irish units since he took over from Fred Goodwin when the bank was rescued in 2008. That restructuring, which Hester has likened to defusing “the biggest time bomb in history,” may now be overshadowed by the regulatory probe into allegations that banks manipulated the London interbank offered rate.

The shares rose 0.9 per cent to 206.3 pence by 8:09 am in London, for a market value of about GBP23 billion. RBS shares have increased 1.1 per cent this year in London trading after sinking 48 per cent last year. The taxpayer owns 82 per cent of the lender after paying the equivalent of 502 pence a share.

RBS made a provision of GBP125 million to cover costs linked to a computer failure at its consumer bank in June that left most of its 15 million account holders unable to access their accounts for days. Adding provisions for the mis-selling of interest rate swaps and payment-protection insurance, the bank set aside a total of GBP310 million for redress.

RBS has dismissed four employees for trying to influence the individual responsible for Libor submissions following an internal investigation, Finance Director Bruce Van Saun said in a Bloomberg Television interview today. He said it was too early to give an estimate for the potential costs RBS faces for its involvement in the scandal.

“The Libor situation is on our agenda and is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact,” Hester said in the statement.

The bank may be fined GBP420 million by regulators and have to pay GBP680 million more to settle civil lawsuits following the probe, Morgan Stanley analyst Betsy Graseck said in a July 12 report.

Barclays Plc was fined a record GBP290 million in June when it became the first bank to reach a settlement with regulators. The fine, coupled with criticism from regulators, forced the departure of the London-based lender’s chairman, CEO and chief operating officer.

RBS said in January it would cut about 3,500 jobs at the investment-banking division, run by John Hourican, and sell or close the unprofitable cash equities, mergers advisory and equity capital markets divisions. Hester decided to dispose of the units after volatile markets and increasing regulation made it harder to generate returns that beat the cost of equity.

Revenue at the remaining markets unit, which includes debt capital markets and foreign exchange, fell to GBP1.07 billion in the quarter from about GBP1.17 billion in the year earlier period, hit by a decline in trading as lawmakers failed to find a solution to the European sovereign debt crisis. Income beat the GBP932 million estimate of Shailesh Raikundlia, a London-based analyst at Espirito Santo Investment Bank.

Revenue and margins at the consumer unit are being squeezed as the UK economy contracted for a third quarter and the Bank of England holds its benchmark interest rate at a record low. Operating profit at the unit fell 18 per cent to GBP437 million in the three months to June. The unit’s net interest margin, the difference between what it earns on loans and its cost of funding, fell to 3.57 per cent by the end of the first half from 4.04 per cent.

Operating profit from its insurance unit, Direct Line Insurance Group Plc, rose 6 per cent in the first half to GBP219 million from the year-earlier period. Preparations for the initial public offering of the unit in the second half “remain on track,” the bank said.

The net loss narrowed to GBP466 million in the quarter from GBP897 million in the year-earlier period.

The UK rescued RBS at the height of the financial crisis, injecting GBP45.5 billion of money into the lender, making it the costliest bailout of any bank.

Senior ministers are discussing buying out the part of RBS the government doesn’t already own to boost the flow of credit to small companies, the Financial Times reported yesterday, citing unidentified government advisers.

“Any move to fully nationalise RBS would face stiff opposition from taxpayers given that the value of the investment in the bank has fallen by more than half,” Raikundlia wrote in a report to clients yesterday. “There could potentially be a large management exodus leaving a huge challenge for the government to manage a bank with GBP1 trillion of assets.”

The Treasury is opposed to any such plan and UK Financial Investments Ltd., the body that oversees the taxpayer’s stake, said in its annual report last month the government is committed to returning RBS to private ownership at the earliest appropriate opportunity.

“There’s probably, in the end, better ways to facilitate lending on the part of all banks in the UK than to nationalise RBS,” Van Saun said in the interview.

(Source: Bloomberg)