Royal Bank of Scotland Group PLC share price up, reports better-than-expected profit despite increasing legal costs

Royal Bank of Scotland reported a third-quarter profit above analysts expectations even as it set aside provisions to cover any potential fines related to the ongoing investigation into alleged manipulation of the currency market.

The bank reported it has put away a £400 million provision associated with the investigation and another £100 million to compensate customers for mis-sold payment protection insurances.

The total amount for litigation and conduct costs in the quarter reached £780m, including the probe into recent IT system failures, said RBS CEO Ross McEwan as he hinted that there might be further funds set aside for future legal expenses.

“While we are pleased about having had three strong consecutive quarters of growth we are not complacent and know there will still be bumps in the road ahead,” he said.

Barclays is one of the six banks in negotiations with UK regulators over accusations of manipulating the currency market. The banks are expected to go into a joint settlement with the Financial Conduct Authority. The value of the agreement is estimated to be about £1.5 million and in mid-November, sources familiar with the situation have said.

Citigroup, UBS, Barclays and JPMorgan, have also set provisions to cover any potential fines. HSBC is expected to do the same, as it reports on Monday.

On Friday, the 80% state-owned British lender reported a pre-tax profit of £1.27 billion in the third quarter, compared to a loss of £634 million last year and ahead of its prediction of £1.1 billion.

Economic growth in the UK and Ireland helped the company achieve positive third-quarter results. However, the bank warned that the countries development is likely “to moderate” next year.

RBS reported it nearly cut in half its restructuring costs to £180 million and recovered £801 million in bad debts. Both factors boosted the companys performance in the third quarter.

Net income reached £896 million and basic earnings per share were 7.9 pence in Q3, compared to £230 million in the second quarter and a loss of £828 million in
Q3 2013. Analysts had projected a net profit of around £580 million.

“RBS results have again beat expectations, but as in previous quarters this is primarily due to write-backs, which we do not believe is sustainable into later years,” analysts at Citigroup said in a note.

The bank has closed around 100 branches this year, shrinking its network to a total of 1 900 departments.

“We are reducing costs and are on track to achieve our capital targets.” said Mr. McEwan.

Royal Bank of Scotland Group PLC gained 1.53% on Thursday and closed at GBX 365.30. On Friday the stock edged up 3.75% to trade at GBX 379.00 at 09:34 GMT, marking a one-year increase of 3.10%. The company is valued at GBP 41.81 billion. According to the Financial Times, the 25 analysts offering 12-month price targets for Royal Bank of Scotland Group PLC have a median target of GBX 360.00, with a high estimate of GBX 500.00 and a low estimate of GBX 250.00. The median estimate represents a -1.45% decrease from the last close price of GBX 365.30.