The Royal Bank of Scotland Group plc’s (RBS) share price jumped 10.73% to $12.38, following the impressive earnings for the six months ended Jun 30, 2014. First-half 2014 profit from continuing operations came in at £1.92 billion ($3.20 billion), rising more than twofold from £696 million ($1,074.9 million) in the prior-year comparable period.
Results were driven by lower loan impairment losses and reduced operating expenses. Additionally, the results reflected higher net interest income. However, reduced non-interest income was on the downside.
Operating income more than tripled to £2.6 billion ($4.3 billion) on a year-over-year comparison. The rise was attributed to the lower impairment losses. Adjusted operating profit, excluding restructuring and litigation and conduct costs more than doubled to £3,365 million ($5,615.2 million) on a year-over-year basis.
Furthermore, division-wise, in the first half of 2014, Personal & Business Banking segment’s operating profit more than doubled while Commercial & Private Banking segment reported a rise of 55.7% year over year. Further, Corporate & Institutional Banking reported profit as compared with loss in the prior-year period while Central items segment reflected a fall of 83.5% in operating profit.
RBS Capital Resolution (RCR), created in Jan 2014, reported operating loss of £48 million ($80.1 million), while Citizens Financial Group reported a rise of 19.3% in operating profit.
Performance in Detail
Net interest income inched up 1.0% on a year-over-year basis to £5,496 million ($4,465 million) in the reported period. Net interest margin increased 20 basis points to 2.17%, driven by repricing activities across a number of divisions.
Non-interest income came in at £4,482 million ($9,171 million), down 13.2% year over year. The decline reflected reduction in income from trading activities, net fees and commissions and other operating income.
Operating expenses for the reported period totaled £7,108 million ($11.9 billion), down 8.3% year over year. Adjusted operating expenses, excluding restructuring and litigation and conduct costs were down 8% to £6,344 million ($10.6 billion). The decline was attributed to headcount reductions and prudent control of discretionary expenditure in Corporate & Institutional Banking (CIB). Notably, restructuring of the bank’s cost base are showing benefits.
Moreover, adjusted cost to income ratio improved to 64% from 65%.
Loan impairment losses decreased 87.5% to £271 million ($452 million) from the prior-year period. Notably, asset quality continued to improve in the UK and Ireland.
Balance Sheet
As of Jun 30, 2014, RBS exhibited a strong capital position. Funded assets stood at £736 billion ($1.25 trillion), down slightly from £746 billion ($1.23 trillion) as of Dec 31, 2013. Total assets were £1,011 billion ($1.72 trillion), down from £1,028 billion ($1.69 trillion) as of Dec 31, 2013.
Net loans and advances to customers were £387 billion ($659 billion), down from £393 billion ($648 billion) as of Dec 31, 2013. Loan to deposit ratio was 96% compared with 94% in the prior-year quarter.
As of Jun 30, 2014, Common Equity Tier 1(CET) ratio was 10.1%, compared with 8.6% as of Dec 31, 2013. RBS continues to target a fully loaded Basel III CET1 ratio of 11% by the end of 2015 and 12% or above by the end of 2016.
Risk-weighted assets came in at £392 billion ($667 billion), down from £429 billion ($707 billion) as of Dec 31, 2013.
Outlook for 2014
With the ongoing economic recovery in the UK, management anticipates net interest margin to remain close to the first-half 2014 levels. Moreover, income from fixed income products is anticipated to reduce in the second half of 2014. The decline is expected to reflect seasonality and the continuation of the bank’s efforts on minimizing balance sheet risk.
RBS targets £1 billion cost reductions in 2014 to be accomplished, though restructuring costs are expected to be higher in the second half of 2014. Notably, restructuring charge of about £1.5 billion is anticipated in 2014, with overall restructuring costs to be around £5 billion over 2014 to 2017.
Management expects RCR funded assets to be down from £29 billion at its inception to about £15 to £18 billion at the end of 2014. The overall costs including impairments, disposal losses and running expenses for RCR is expected to be £2.5 to £3.0 billion between 2014 and 2016, of which £0.8 billion is anticipated in 2014, subject to potential volatility.
Further, RBS anticipates credit impairment charges in the second half of 2014 to remain low, subject to macro economic conditions, resulting in a charge of about £1 billion for 2014, subject to quarter-to-quarter volatility.
Our Viewpoint
We expect RBS’ diversified business model and sound financial position to contribute to its overall growth going forward. Though increased competition, volatility in the global economy and the new regulations will remain plausible concerns, ongoing restructuring will help counter some of the challenges.
Shares of RBS currently carry a Zacks Rank #1 (Strong Buy).
Among other foreign banks, Deutsche Bank AG (DB) and UBS AG (UBS) are scheduled to report second-quarter 2014 results on Jul 29, while Brazil’s Itau Unibanco Holding S.A. (ITUB) will report on Aug 5.
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