Royal Bank of Scotland (RBS) beat expectations with a return to profit in the first quarter as bad debts continued to shrink, even as investment banking profits more than halved after a bumper start to last year.
Following in the footsteps of bailed-out British rival Lloyds, which announced an unexpected return to profit in the first quarter last week, part-nationalised RBS said impairments had continued to drop and margins rose from historically low levels in 2009.
The bank said it expected net interest margins to "gradually improve" over 2010.
But RBS, still nursing its wounds after it was caught in the maelstrom of the financial crisis, warned bad debt levels would remain high and could be volatile, particularly in the non-core portfolio that includes assets it is planning to sell.
"Global recovery is helping impairments fall a little faster than we expected, though lumpy events may well interrupt that trend," chief executive Stephen Hester said.
RBS, 83 per cent state-owned, said operating profit for the first three months totalled £713 million ($1.10 billion) compared with a loss of 1.35 billion in the fourth quarter and a profit of 179 million a year ago.
Analysts had expected an operating loss.
After costs including £500 million related to a government-backed insurance scheme for bad debts, the bank posted a pre-tax loss of £21 million.
Impairment losses dropped to £2.68 billion in the first three months compared to £3.1 billion in the fourth quarter last year and the bank said trends were "favourable", confirming its prediction that bad debts peaked in 2009.
The bank's net interest margin improved to 1.92 percent, up 9 basis points from the fourth quarter.
Reuters