Lower provisions have been anticipated in the market for several years. But RBS's generous dividend suggests that banks could become cash cows for shareholders. With less need to retain earnings because lending demand remains slow, banks can distribute more in dividends. But shareholders will want to see evidence that banks can grow earnings as well.
RBS's strategy is to reduce volatility by focusing on businesses that are not linked so closely to the UK economic cycle, such as insurance, the US and mortgages. It seems to be working so far.
But what really differentiates RBS from its rivals is its gold mine, Direct Line Insurance, which reported trebled profits last week. The 33p jump in RBS shares yesterday reflected continued euphoria about Direct Line's earnings potential as much as the recovery in UK banking profits and the dividend.
The bank's pounds 1.4bn market value assumes Direct Line can meet its target of gaining 25 per cent of the motor insurance market. With no competition in sight, it may succeed - making the shares worth holding.
Yet, excluding Direct Line, it has lagged behind other banks in cutting costs, lending and retail banking. Whether RBS can reach its goal of becoming Britain's top-performing financial institution by 1997 is another issue.Reuse content