Shares in Royal Bank of Scotland (RBS) soared 13% after second quarter results for the bailed-out bank delighted investors.
RBS posted a £1 billion pre-tax profit for the second quarter of the year due to a turnaround in losses from bad loans. While the bank had been saddled with £1.1 billion of impairments in the second quarter of last year, this year it was able to claw back £93 million as it wrote back losses that had been booked on bad loans.
The profit, which RBS has released a week earlier than planned, is far ahead of expectations with the consensus of analysts having predicted a small loss.
'Our thesis on RBS has been that it will perform better than the consensus expects operationally but also, significantly, shall see provision write-backs,' said Jefferies analyst Joseph Dickerson. 'RBS's second quarter pre-announce supports this, with net write-backs at the group level. We continue to see up to £20 billion of excess capital by 2016. Buy.'
Chief executive Ross McEwan said the results showed RBS was becoming 'a much simpler, smaller and fairer bank'.
'These results show that underneath all the noise and huge restructuring of recent years RBS is a fundamentally stronger bank that can deliver good results for customers and shareholders.'
However, he cautioned that future profits would be hit by the regulatory fines and lawsuits the bank faces. 'No one should get ahead of themselves here - there are bumps in the road ahead of us.'
Lloyds and Barclays rise
It proved a good morning for banks, with Lloyds Banking Group (LLOY) up as it announced it was close to agreeing a settlement over alleged manipulation of the Libor rate.
'LBG confirms that it is in late-stage settlement discussions with a number of agencies,' the bank said in a statement. Shares rose 1.8% to 75.3p on the news.
Barclays (BARC) also took part in the banking rally, trading 1.9% higher at 218.7p.
Bright spell for UK plc
The FTSE 100 rose five points, or 0.1%, to 6,829, buoyed too by Office for National Statistics data showing the UK economy grew 0.8% during the second quarter of the year. The growth, in line with expectations, is equal to that recorded in the first three months of the year and means the UK economy is now above its pre-financial crisis levels.
'A milestone in the UK recovery has been reached after a further strong performance in the second quarter brings the size of the economy above its pre-crisis peak,' said Chris Williamson, chief economist at Markit.
'The solid pace of expansion represents a continuation of a strong upward growth trend that has been evident since early last year. This is the best spell of continuous growth that the UK has seen since 2007.'
Mergers and warnings
BSkyB (BSY) fell 33p or 3.6% to 892.5p as it agreed to spend more than $9 billion (£5.3 billion) on buying stakes in Italian and German pay-tv operators from its 39% shareholder 21st Century Fox. The funds will help Fox, which is also part of Rupert Murdoch's News Corp empire, in its $80 billion (£47 billion) bid for Time Warner.
Consolidation hopes gripped the construction sector as Balfour Beatty (BALF) and Carillion (CLLN) confirmed they were in talks over a possible £3 billion merger which could create a company with more than £14 billion in revenues and an order book of over £31 billion. Balfour jumped 22p or 9.5% to 254.2p and Carillion leaped 36.5p or 10.8% to 375p.
Also in the FTSE 250, Spectris (SXS) slid £1.10 or 5.25% to £19.85 after the electrical engineering equipment maker revealed a 10% drop in half-year profits to £67.3 million. It blamed the strong pound and weaker-than-expected performances from its mining and academic research businesses.
Among smaller companies, shares in PR company Huntsworth (HNTS) fell 1.5p or 3.7% to 40.1p after the owner of Citigate Dewe Rogerson warned first half profits would miss forecasts.
Read The Accumulator for our review of the week in markets