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Why Shares In Royal Bank of Scotland Group plc Jumped

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

rbsWhat: Shares in RBS (LSE: RBS) (NYSE: RBS.US) added 37p, or 12%, to 344p during early trade this morning after seeing an upsurge in profit in the three months to the end of March.  

Pretax profit nearly doubled to £1.6bn from £747m in the same period last year.

So what: This is only the sixth time RBS has posted a quarterly profit since its bailout in 2008. The bank, 81% owned by the taxpayer, was buoyed from no additional writeoffs for payment protection insurance or toxic assets. In the previous quarter RBS was charged £465m for PPI mis-selling.

Net profit totalled £1.2bn, which was far greater than the £200m analysts had forecast. According to the chief executive, Ross McEwan, today’s results reflect that his strategy is working. He commented:

“Just over two months ago, I set out our plan for making RBS the most trusted bank in the UK. Today’s results show that in steady state, RBS will be a bank that does a great job for customers while delivering good returns for our shareholders.”

Now what: The internal “bad bank” RBS set up to fence its riskier assets — such as complex derivatives and underperforming loans — has paid off.

But that’s not to say there aren’t still legacy issues to deal with. RBS still expects to make a loss in 2014 despite making a Q1 profit. RBS expects more fines relating to mis-selling mortgage bonds in the US, and other charges for market manipulation.

RBS and several other major banks are presently assisting regulators in an investigation into the manipulation of the $5.3tn forex market.

RBS announced in April that it has agreed to retire a measure preventing the bank from paying dividends to private shareholders. The cancellation of the dividend access share (DAS) will cost £1.5bn, before which RBS will seek shareholder approval at its upcoming AGM.

In addition, RBS said Nathan Bostock, the group’s finance director, will step down on 28 May to join rival Santander.

How investors can avoid risk

While short-term gains can help you become wealthy, there are still clouds over RBS, so make sure to guard from risk and diversify

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Mark does not own shares in RBS.