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Back to black for RBS but the bank remains in rehab

It’s taken awhile but after many false dawns over the past decade RBS has finally managed to return an annual profit, albeit a minor one of £752m, and for that we can thank the fact that the bank hasn’t settled its outstanding dispute with the US Department of Justice.

Leading up to this year’s numbers management had been keen to downplay the prospect that this day would come, probably a wise course of action given the bank’s current woes, but nonetheless it also served a purpose in keeping the bar low on expectations.

That hasn’t stopped the banks share price dropping in early trading as investors continue to take some profits on the best performing, in share prices terms, of the UK banks in the past 12 months, with the share price dropping to its lowest level this year.

Problems still remain on the legacy side with the bank yet to settle its issue with the US Department of Justice over mortgage backed securities mis-selling, the costs of which could be in the region of $10bn.

The bank set aside another £764m in respect of litigation provision in Q4, with $650m of that going towards the DOJ case, taking the overall provision so far for that case to $4.4bn, still leaving it well short of what the total bill might be. Unsurprisingly given this gap the bank warned this was unlikely to be the end of further litigation provision in respect of this case warning that it is quite likely that we’ll see further sums get set aside in future quarters.

Management went on to announce further restructuring plans, which are expected to cost about £2.5bn by the end of 2019, as the bank looks to implement the ring fence regime by 1st January 2019.

The problems over questionable behaviour at its now defunct Global Restructuring Group continue to hang over the bank like a bad smell, particularly given the reluctance of the regulator to sanction the release of the report into the public domain. Provision here was left unchanged at £400m, though the reputational damage could well be longer lasting raising the prospect of how you value the potential intangible effects of future lost business this episode is likely to cause in the future.

On the underlying core business the bank has continued to do well, though its net interest margin remains on the low side at 2.04%, despite the recent rise in interest rates, while net income fell short of expectations.

In summary to quote the late Amy Winehouse, RBS may be back to black, but it still remains in rehab.

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