The private banking arm of the UK lender logged a surge in first-half profits for 2018.

(Updates with analyst comment, share price.)

The private banking arm of Royal Bank of Scotland, comprising Coutts and Adam & Co, today reported an operating profit of £151 million ($196.5 million) for the first six months of 2018, surging by 85 per cent on a year earlier. The gain was driven by higher levels of client balances and income as well as cost cuts.

Return on equity increased to 15.8 per cent, up by 8 per cent from a year before, RBS said in a statement on its results. Total income increased by £61 million, or 19 per cent, to £382 million compared to H1 2017 largely due to increased lending and assets under management, it said.

Operating costs, of £225 million, fell by £7 million, or 3 per cent, reflecting lower strategic costs, a reduction in back-office operations costs and a decrease in staff costs driven by a 17.5 per cent headcount reduction.

RBS said that in its commercial and private banking arm, assets under management rose by £1.8 billion, or 9.3 per cent. Private banking oversees a further £7.2 billion of assets under management on behalf of RBS Group which sit outside of private banking. Total assets under management overseen by the private bank have increased by 7.1 per cent to £28.6 billion.

(Comparisons with prior periods are affected by the transfer of the Collective Investment Fund business from UK PBB and by the transfers of Coutts Crown Dependency and the International Client Group Jersey booked balances to RBS International.)

“We’re continuing to invest in our platform at record levels and the improvements across wealth management, lending and banking are now obvious and we are seeing the results. Our increase in return on equity to 15.8 per cent, is particularly encouraging as is the increase in new business volumes and new clients to the bank,” Peter Flavel, Coutts chief executive, said. 

Across the entire group, RBS, which is still majority-owned by the UK taxpayer a decade on from the global financial crisis, said its pre-tax operating profit for the first six months of this year was £1.826 billion, down from £1.951 billion; the profit attributable to shareholders in this period was £888 million, down from £939 million.

The lender reached a civil settlement in principle with the US Department of Justice over the organisation’ probe into RBS's issuance and underwriting of US residential mortgage backed securities between 2005 and 2007, leading to a £1.040 billion additional provision in Q2 2018. In addition, a £241 million provision release relating to a RMBS litigation indemnity was recognised in the quarter, it said.

At the end of June, RBS had a CET1 ratio – a common international measure of a bank’s capital buffer – of 16.1 per cent. Recently, Moody’s, the credit rating agency, upgraded the bank’s senior debt rating by one notch to Baa2 and changed its outlook to positive.

Shares in the bank were up 1.81 per cent at 10:00 GMT, at 6.75 pence per share.

“But the most important sign of an increased health of the bank came in the form of the announcement of the first interim dividend  since the financial crisis of 2pence per share, this combined with the  better than expected profit figures has contributed to the share price rising in early morning trading by a few percentage points. The reinstatement of the dividend will not only give existing shareholders some confidence but also to the large number of fund managers who could not invest in them previously due to the lack of any income and it will make the governments task of offloading its roughly 62% holding onto the market a  little easier," Helal Miah investment research analyst at The Share Centre, said. 

“However, this does not mean it is going to be all plain sailing for RBS from here, the group still has many legacy issues to overcome and restructuring is still ongoing including many assets still left to dispose. The dividend hike for the time being means that the income is still very modest and we therefore feel that it is a share for investors seeking capital growth and a longer term recovery in the share price for those willing to accept a medium level of risk," Miah added.