ROYAL Bank of Scotland chief executive Stephen Hester believes business lending will remain flat until the economy improves and has signalled a possible flotation of the branches the bank is being forced to sell by the European Union.
RBS yesterday reported an improvement in underlying third- quarter profits from £2 million to £1.05 billion.
However there was a £400m charge for payment protection insurance compensation – bringing the provision so far to £1.7m – plus other one-off costs of £451m, including £257m for "integration and restructuring".
On top of those figures there was a £1.46bn own credit adjustment, a financial metric relating to the value of the bank's debt, which took the overall pre-tax loss to £1.26bn. That compared to a £2bn profit in the same quarter in 2011, although that was skewed by a £2.6bn gain on the credit adjustment figure.
Non-core assets fell by a further £7bn to £65bn while bad-debt losses declined by £159m to £1.2bn.
The bank said there was a 25% drop in loan applications from small and medium enterprise (SME) customers in the third quarter, which was attributed to the weak economy and less activity in some sectors around the Olympics.
Total SME lending was flat but had reached £28.6bn in the first nine months of this year out of a gross corporate lending total of £62.9bn.
The UK corporate division used the recently launched Funding for Lending Scheme to allocate £597m of funds to 4300 SMEs by September 30. Mr Hester said: "My general feeling is for so long as the economy is flat-ish then lending demand will be flat-ish or maybe even slightly negative.
"Generally, businesses' desire to take on more risk and open new factories and so on requires them to be more confident and see their order books rising before they start doing that.
"Our desposits from SMEs rose by £500m this last quarter, which suggests they would rather deposit the money with us than open new factories at this stage of the economic cycle.
"From our point of view I wish they would borrow more. We have more money to offer them and it would help us to grow and help our share price be higher."
Mr Hester confirmed there were parties interested in buying the 316 branches which had been slated for a sale to Santander but creating a new bank was a possibility.
However, he does not believe the EU – which asked for the sale as a penalty for RBS receiving state aid – would allow the Edinburgh bank to retain the sites.
He said: "I don't expect the EU to be in a mood to change its sanctions.
"One option is to have it as an independent bank. Buoyed up by the success of the Direct Line turnaround and IPO I don't think we should rule out the possibility of a £20bn bank with £1bn market cap.
"We have a brand name ready for it, Williams and Glyn, and that is one of the possibilities we will compare against possible buyers as we go into next year."
Mr Hester hopes to have received notice of any potential fines RBS faces over alleged Libor rigging in the next few months.
He said: "It will be a miserable day in RBS's history. It will represent completely unacceptable behaviour by a small number of people.
"It is something we need to have as an emblem of mistakes to be corrected and a place we don't want to go in the future."
Direct Line Group, which floated on the London Stock Exchange last month as part of its separation from RBS, reported a fall in third- quarter profits from £107.7m to £82.4m.
Shares in RBS were down 2%, or 5.9p, at 281.3p.
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