(FT) -- Royal Bank of Scotland's recovery was held back in the third quarter after £1.7bn ($2.7B) of accounting charges clouded the ongoing improvement at the government-backed lender's core businesses.
RBS swung back into a pre-tax loss of £1.4B ($2.3B) compared with a pre-tax profit of £1.2B ($1.9B) in the previous three months, after it was hit by charges relating to the value of its own debt and the cost of the government's asset protection scheme.
But the bank made further progress in transforming its key underlying businesses, which helped to push core operating profit up 10 percent to £1.7B ($2.7B).
It also continued to sell off unwanted assets, leading to narrower losses at its non-core business. The bank removed a further £20B ($32B) of assets from its non-core balance sheet in the third quarter -- more than had been expected -- which included £11bn ($17.8B) from disposals.
Stephen Hester, chief executive, warned that the pace of improvement in the business would slow as a result of economic challenges such as continued low interest rates and regulatory costs.
"While it is not raining hard there are still clouds on the horizon," he said. "Banks will need to hold four times more capital and a whole lot more liquidity".
He expected the bank would make a small loss for the full year.
However, Mr Hester said the spotlight would increasingly turn to the bank's core businesses -- the "new RBS" -- which were making good progress.
The retail business is recovering fast -- profit before impairment losses rose 13 percent in the third quarter as its net interest margin improved. Mr Hester said this was more of a reflection of customers moving off very cheap mortgage deals than higher new loan prices. Margins on new retail business had been "pretty flat" quarter-on-quarter.
However, Mr Hester warned that the current margins could not withstand the tougher capital requirements banks are facing.
"Current margins are not high enough for a 400 percent increase in capital," he said.
The investment banking division had a tougher quarter, with revenues, excluding fair value of the bank's own debt, falling 20 percent to £1.5B ($2.4B) as customer trading volumes fell.
RBS set aside 34 percent of revenue for pay and bonuses, a considerably higher percentage than a year ago.
The insurance business improved in the third quarter following a sharp rise in bodily injury claims earlier in the year, but nevertheless remained loss-making.
The overall numbers were clouded by an £858m ($1.39B) charge in relation to movements in the value of the bank's own debt and an £825m ($1.33B) charge on assets covered by the government's insurance scheme, both of which reflected tightening credit spreads.
The bank's share price rose by 1.5 percent to 47.87p in early trading on Friday.
CNN
