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RBS posts 1st annual profit in 10 years, but US RMBS settlement still uncertain

Royal Bank of Scotland Group Plc reported its first full-year profit since before its nationalization during the 2008 financial crisis, but a potentially hefty U.S. fine over alleged misselling of residential mortgage-backed securities still hangs over the bank.

The British bank reported full-year 2017 profit attributable to ordinary shareholders of £752 million, or 6.3 pence per share, compared to a year-ago loss of £6.96 billion, or 59.5 pence per share. Litigation and conduct costs fell year over year to £1.29 billion from £5.87 billion, while restructuring costs also decreased to £1.57 billion from £2.11 billion.

RBS said it continues to be in talks with the U.S. Department of Justice over the matter, but that the duration, timing for resolution and outcome of the probe "remain uncertain, including in respect of whether settlements for all or any of such matters may be reached."

"Further substantial provisions and costs may be recognized and, depending on the final outcome, other adverse consequences may occur," the bank said. As of 2017-end, the total aggregate of provisions in relation to U.S. RMBS was £3.2 billion.

Return on tangible equity came in at 2.2% in 2017, compared to negative 17.9% a year ago.

For the fourth quarter of 2017, the bank reported an attributable loss of £579 million, or 4.9 pence per share, narrowing from a loss of £4.44 billion, or 37.7 pence per share, a year earlier. Net interest income for the quarter amounted to £2.21 billion, virtually unchanged from a year ago, while noninterest income declined year over year to £846 million from £1.01 billion.

Litigation and conduct costs for the quarter declined on a yearly basis to £764 million from £4.13 billion. The result included £442 million of additional provisions relating to U.S. RMBS, a further £175 million payment protection insurance provision, and a £135 million provision in Ulster Bank Ireland DAC for customer-related remediation and project costs relating to tracker mortgages and other legacy business issues.

Restructuring costs also dropped to £531 million from £1.01 billion in the fourth quarter of 2016. This included a £129 million charge in NatWest Markets including costs relating to the run-down and closure of the legacy business and back office restructuring activity in the core business and £147 million relating to the business previously described as Williams & Glyn.

The bank's common equity Tier 1 ratio stood at 15.9% as of 2017-end on an end-point CRR basis, compared to 15.5% at the end of September 2017 and 13.4% at 2016-end.

Looking forward, RBS said it maintains its target of achieving a sub 50% cost-to-income ratio and above 12% return on equity by 2020. It also expects operating costs to reduce annually from 2018 to 2020, but given the increased level of investment and innovation spend expected over the coming years, the bank said it no longer expects to achieve an absolute 2020 cost base.