RBS feels competition squeeze as exceeds profit forecasts

By Lawrence White and Emma Rumney

LONDON (Reuters) - Royal Bank of Scotland showed signs of competition squeezing returns and business customers being unhappy with its services on Friday, which combined with a looming Department of Justice fine to overshadow a forecast-beating first quarter profit.

Shares in the British state-backed bank, which has spent the best part of the last decade trying to recover from a near collapse during the financial crisis, opened lower after RBS posted first quarter pre-tax profit of 792 million pounds ($1.1 billion), more than double analysts' forecasts.

"This is a good set of results showing the progress we are making despite a more competitive marketplace," Chief Executive Ross McEwan told reporters after the results.

McEwan would not comment on when an expected multibillion dollar settlement with the U.S. Department of Justice (DOJ) would finally be reached.

"I got the timing wrong last year, I've given up commenting on when it will come," he said.

RBS had hoped to settle the case, which relates to its mis-sale of toxic residential mortgage-backed securities, as it is a prerequisite for the bank to resume paying dividends and for the British government, to start to selling its 71 percent stake.

While the headline profit figure showed a healthy business emerging from years of restructuring and legal costs, Friday's RBS results also showed signs that an increasing competitive British banking market is squeezing its returns.

Net interest margin, a measure of the gap between what it pays savers and charges borrowers, fell by 0.2 percentage points from the same period a year ago amid pressure on loan margins.

And although RBS reported a common equity tier one capital ratio of 16.4 percent, up from 15.9 percent in February, that did not include the impact of the payment into the bank's group pension fund that will be booked in the second quarter.

The bank also showed signs that cost-cutting is beginning to upset customers.

The bank's 'net promoter score', a measure of how likely customers are to recommend a brand, fell sharply as small business customers reacted badly to having their personal account managers replaced by call centres.

"The negative and deteriorating net promoter scores in NatWest branded business banking look awful,” analyst Joe Dickerson at Jefferies said.

Analysts had expected the British state-backed bank, which returned to annual profit for the first time in a decade last year after shedding trillions in assets and spending billions on restructuring, to deliver 319 million pounds in pre-tax profit.

RBS's restructuring costs for the first quarter fell to 209 million pounds from 509 million in the same period a year ago, while conduct and litigation charges were just 19 million pounds, down from 764 million pounds a year ago.

A long period of low interest rates in Britain and competition from upstart new lenders have combined to squeeze rates on mortgages and business loans in recent years, eroding bank profit margins.

($1 = 0.7182 pounds)

(Reporting by Lawrence White and Emma Rumney; editing by Carolyn Cohn/Jane Merriman/Alexander Smith)