Bad-debts cheer for Royal Bank

THE worst of bad debts could be over for Royal Bank of Scotland, according to its 'early early warning system' for detecting future problem loans.

The bank, which reported a strong set of first-half numbers with headline profits up 25%, said potential problem loans were down by 18% to less than £1bn.

While lifting the bad debt provision from £652m to £742m in line with the larger loan book, chief executive Fred Goodwin said: 'I'd be reluctant to claim victory, but the signs are encouraging.'

While bad debt provisions reflect loans where the borrower has already defaulted, the 'future problem loans' category is more forward looking. In normal times, most of the borrowers put in this category eventually repay the money, but it is seen as a useful measure of future credit quality.

RBS, which owns NatWest, Coutts and Direct Line as well as the mushrooming Citizens empire in the US, lifted pre-tax profits to £2.9bn and raised the interim dividend by 15% to 14.6p. Before goodwill and one-off charges, the profits increase was a more modest 10% to £3.45bn, in line with expectations. Traders marked the stock down 58p to 1684p, taking profits after a strong run for the share price.

Profits grew across the group except in wealth management, where tumbling stock markets deterred customers. Costs were well controlled, with the key cost/income ratio improving from 44.2% to 43%

Goodwin raised the prospect of further acquisitions to keep earnings momentum going, but played down the chances of another transformational deal like NatWest, which has delivered annual savings and extra revenues of £2.33bn.

'We're now the fourth or fifth-biggest bank in the world. Deals like NatWest do not come along that frequently,' he said. He was sanguine about the UK economy, but added that there could be a psychological impact on consumers when interest rates start to rise.