The boss of Royal Bank of Scotland warned today that job losses at the taxpayer-backed bank would be more severe than it had hoped because of a "longer and bumpier" road to recovery.
RBS chief executive Stephen Hester said further cost-cutting was on its way as increased regulation and weak economic growth triggers a shift away from investment banking and on to its retail operations.
But RBS saw its shares rise after it returned to profit in the three months to September 30 as it slashed its bad debts and offset a plunge in income at investment arm Global Banking and Markets.
RBS, which is 83% state-owned, posted pre-tax profits of £2 billion in the three months to September 30, compared with a £678 million loss in the previous quarter and a £1.6 billion loss the previous year.
Stock market turbulence, driven by increased global recession fears, saw income at investment arm GBM fall 29% to £1.1 billion in the period, RBS said.
However retail banking revenues held at £4.1 billion and bad debt charges were cut to £1,5 billion, down £728 million on the previous quarter, which was hit by Irish land values.
Mr Hester said the results "highlight the external pressures facing banks, and economies more broadly, which are making the road to recovery longer and bumpier than hoped for".
The bank also reduced its exposure to sovereign debt in Spain, Italy, Greece and Portugal to £772 million by the end of September, down from £4 billion at the start of the year.
RBS said it has now reached the halfway point of its five-year recovery plan adopted in 2009 and has met or exceeded all targets to date.
But Mr Hester warned there would be further job losses, on top of 2,000 announced earlier in the year, as the bank expected to implement proposals put forward by the Independent Commission on Banking (ICB), which include ringfencing its retail operations from its investment arm.
The regulatory changes, combined with the weak outlook for economic growth, will lead to increased focus on its retail division and will require further cost savings, Mr Hester warned.
Mr Hester said: "Forward momentum will be challenging, however, until the economies we serve see stronger growth."
He added: "We will pursue additional cost cutting to reduce the impact on customers and shareholders of the regulatory and market developments."
The weak performance at GBM, driven by subdued client activity and cautious risk appetite, saw overall income fall by 18% to £6.4 billion.
RBS said GBM posted a modest operating profit of £112 million in the quarter, compared with £446 million in the previous three months, and expects difficult conditions to continue in the fourth quarter.
RBS said it improved the level of cash buffers in place to protect against future financial crises - known as capital tier-1 - in the period as it moved in line with European requirements.
While the retail banking arm held revenues, profitability came under pressure as bad debts, particularly in its Irish division Ulster Bank, increased.
The group wrote off £142 million of Greek sovereign debt in the period but added there was little exposure to the remaining periphery nations in the eurozone.
RBS said it provided £28.5 billion of new lending in the third quarter to both businesses and personal mortgages.
Third quarter new business lending comprised £10 billion of new loans and facilities to mid- and large corporates, £4.1 billion of mid-corporate overdraft renewals, £8.1 billion of new loans and facilities to small businesses and £2.3 billion of small business overdraft renewals.
However, the bank warned demand from small businesses "remained more muted".
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: "The bank remains a work in progress, but is making some headway amidst turbulent conditions.
"There is little doubt that major challenges remain for RBS, not least of which is the torrent of regulation which is heading in the industry's direction."
Earlier this week, Barclays said its own investment arm, Barclays Capital, had been "clearly impacted" by the turmoil on the stock market.
BarCap reported a 15% fall in revenues to £2.3 billion and a 49% plunge in underlying pre-tax profits of £388 million.
Elsewhere, US banks, including Goldman Sachs, Citigroup and JP Morgan, last month reported a plunge in revenues.