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Will further provisions weigh on RBS recovery optimism?

The perennial ball and chain around the foot of the UK taxpayer for the last eight years was, earlier this year, able to report a quarterly profit for the first time since Q3 2015. Will this week’s trading update replicate that trend and spark an expectation of a first annual profit since being bailed out, or will ongoing legacy issues continue to weigh on the top line?

It’s reasonable to be sceptical given past experience and previous false dawns, and given that the resolution with the US Department of Justice still remains some way off. The main worry is any eventual fine could well be a lot higher than the one applied last month when the bank settled with the FHFA in relation to similar mis-sold mortgages for £3.6bn, which means we could see additional contingencies set aside for this quarter.

It is also quite likely that we’ll see further sums set aside in respect of PPI given that last week Barclays and Lloyds did the same thing, while the increasing concern over consumer debt levels could prompt the bank to set aside sums in respect of credit card financing.

On the plus side the bank appears to have come to an agreement with the EU with respect to its Williams and Glyns customers. The £833m it is setting aside to pay business customers to move to smaller rivals should finally draw a line under an issue that has cost the bank over a £1bn over the past few years. 

Over the last few quarters the underlying business has outperformed, but this has been overshadowed by the banks legacy issues.

This quarter is expected to follow a similar pattern, which means that ultimately how well the bank does this quarter will once again be determined by legacy issues, as opposed to the health of the underlying business, which has generally performed well over the last few quarters.

Market expectations are for a quarterly profit in the region of £300m at the lower end of expectations to as much as £1bn, to be added to the £259m profit we saw in Q1.

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