Royal Bank of Scotland Group PLC (LON:RBS) more than tripled its first quarter profit as the bank made progress in resolving its legacy issues and turning around the business.
The bank reported net profit of £792mln for the three months to March 31, compared to a profit of £259mln in the year-ago period and analysts' forecasts of £319mln.
But shares fell 2% to 266p in afternoon trading as the lender's decision to leave its full year guidance unchanged disappointed investors despite better-than-expected profits
Total income rose 2.8% to £3.3mln, with growth in the personal and business banking, international and Natwest Markets divisions, the bank said in a statement.
Income in commercial and private banking was flat, in part due to changes made ahead of the UK ring fencing legislation that requires lenders to separate retail banking from the rest of operations.
READ: RBS to pay £3.5bn into pension scheme ahead of UK ringfencing
Competitive mortgage market
The net interest margin fell two basis points to 2.04%, reflecting competitive pressures in mortgages and the impact of new IFRS 9 accounting rules.
"Income growth is being driven by trading activity – which is by its very nature volatile and unpredictable and so might not turn up next time round," said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
"Meanwhile loans to customers, the bread and butter of a retail bank, are shrinking and an increasingly competitive UK mortgage market means the bank isn’t earning the same turn on loans that it used to.
"That’s being offset by cost savings as the bank moves online, but having spent years streamlining the business RBS needs to show its new slimline business model can grow revenues as well as shrink costs."
Operating expenses declined 18% to £2mln as litigation and conduct costs fell by 64% to £19mln and restructuring costs dropped 63% to £209mln.
Impairment costs, however, rose 69% to £78mln.
RBS improves capital position
Risk-weighted assets fell 8.5% to £202.7bn and the company improved its capital position with the common equity tier 1 ratio rising to 16.4% at the end of March from 15.9% at the end of 2017.
"This is a good set of results, showing the progress we are making, despite a more competitive market," said chief executive Ross McEwan.
"Our income is up, costs are down and our capital has strengthened again."
Resolving legacy issues
RBS, which remains more than 70% owned by the taxpayer following a government bailout, said it made progress in resolving its legacy issues.
In March, the bank agreed to a US$500mln settlement with the state of New York for the mis-selling of toxic mortgage-backed securities in the lead up to the 2008-09 financial crisis.
READ: RBS agrees US$500mln settlement with New York State over mis-selling scandal
However, it faces a potentially much larger fine from US Department of Justice over the mortgage mis-selling scandal.
RBS has also been in the dog house in recent months over the conduct of its former Global Restructuring Group (GRG), which is accused of mistreating small firms. GRG operated between 2005 and 2013.
Such legacy issues have weighed on the bank since the financial crisis, having only just returned to its first full year profit in a decade in February.
READ: RBS reports first profit in a decade but shares fall on concerns about hefty US fines
Resuming dividends payments
RBS remains more than 70% owned by the taxpayer and putting its previous misconduct behind it will be key to resuming dividend payments.
"Operationally, there are still areas to be addressed, with a slightly disappointing reduction in net Interest margin and a downturn in mortgage lending due to fierce competition being notable examples," said Richard Hunter, head of markets at Interactive Investors.
"The real issues, however, are rather larger than the content of this quarterly update.
"There remain three major hurdles to be cleared in the form of settlement of the US legacy issues once and for all, the removal of the UK government stake and the resumption of the dividend."
CEO defends branch closures
As part of the bank's restructuring, it has been closing down many of its branches to cut costs and focus on improving its digital offering as more consumers choose online banking.
McEwan defended the closure of 52 Scottish branches this spring after receiving criticism from unions. He said the closures were in response to customer choices with branch transactions falling 7% in the first quarter.
More branches that are currently part of the Williams & Glyn network are also expected to be closed.
Williams & Glyn was to be sold as a condition of RBS's taxpayer bailout but the EU has agreed to the group's alternative plan to set up a fund for challenger banks to boost competition.