RBS's Q3 loss halves but more bad debts to come

LONDON (Reuters) - Royal Bank of Scotland (RBS.L) more than halved its operating losses to 1.5 billion pounds ($2.5 billion) in the third quarter as impairments fell, but less favorable trading battered investment banking profits.

Part-nationalized RBS said impairment losses totaled 3.3 billion pounds, down 30 percent from 4.7 billion in the second quarter and were showing signs of leveling off.

But the bank cautioned bad loans were expected to "remain at elevated levels for the next few quarters."

RBS said operating profit for its global banking and markets business shrunk to 375 million pounds in the latest quarter, from 1.1 billion in the second quarter, as "exceptionally strong conditions" seen in the first and second quarters eased.

Its UK Corporate profit climbed to more than four times its level at the second quarter, but the bank saw worsening losses at its Ulster Bank and U.S. retail and commercial business as impairments rose and operating conditions remained tough.

"I have repeatedly said this is a marathon, not a sprint, and so it is proving," Chief Executive Stephen Hester said of the banks' performance over the past three months.

RBS had warned in August that investors should not expect a "miracle cure" for the battered bank, where investment banking profits, which have lifted the bottom line for most of its rivals, have failed to offset the impact of bad debts.

Earlier this week RBS secured a further 25.5 billion-pound capital injection from the government as part of a deal that will make the terms of a government-sponsored insurance scheme for bad debts more flexible, but will also see dramatic disposals and increase the state's stake to over 84 percent.

Both RBS and bailed-out rival Lloyds Banking Group (LLOY.L) agreed to cut back their business to meet EU state aid rules, but RBS was particularly badly hit, forced to sell chunks of its retail bank, its RBS Insurance arm and to shrink its investment bank. Both also agreed to drastic bonus caps.

Hester said on Tuesday the decision would make it harder to turn round the bank, one of the top recipients of bailout funds.

Analysts have highlighted concerns for the bank's Global Banking and Markets arm, which after Tuesday's decision has been ordered not to rise above number five in the global all-debt markets league table for three years, as well as agreeing to cap cash bonuses -- morale-sapping decisions that could make it even harder to retain staff.

RBS has said it would consider a rights issue to refinance part of the government's extra investment.

In a trading statement released alongside Tuesday's shake-up, Lloyds said it continued to expect a loss before tax for 2009 but confirmed that it had seen a reduction in the run-rate of overall impairment provisions in the third quarter, compared to the first half.

(Reporting by Clara Ferreira-Marques and Steve Slater; Editing by Greg Mahlich)