The Royal Bank of Scotland Group plc (RBS) reported loss for fourth-quarter 2014. Loss attributable to shareholders came in at £5.8 billion ($9.2 billion) compared with loss of £8.7 billion ($14.1 billion) in the prior-year comparable period.
Results were impacted by write downs of Citizens and deferred tax assets along with higher restructuring, litigation and conduct costs. However, the results reflected increased net interest income and lower operating expenses.
Operating loss was £375 million ($594 million) as against loss of £8.1 billion ($13.1 billion) in the prior-year quarter. The reduction in loss resulted from reduced impairments and litigation and conduct charges. Adjusted operating profit, excluding restructuring and litigation and conduct costs significantly improved to £1.4 billion ($2.2 billion) on a year-over-year basis.
Furthermore, division-wise, Personal & Business Banking (PBB) and Commercial & Private Banking (CPB) segments reported operating profit as against loss in the prior-year period. Corporate & Institutional Banking (CIB) and Central items segment reported loss in this as well as the year-ago quarter.
RBS Capital Resolution (RCR), created in Jan 2014, reported operating profit of £398 million ($630 million), while Citizens Financial Group (CFG) reported a rise of 47.5% in operating profit.
For 2014, loss attributable to shareholders was £3.5 billion ($5.8 billion) compared with loss of £9 billion ($14.1 billion) a year ago. Operating profit was £3.5 billion ($5.8 billion) as against loss of £7.5 billion ($11.7 billion) in the prior year.
Performance in Detail
Net interest income inched up 3.6% on a year-over-year basis to £2.9 billion ($4.6 billion) in the reported period, attributed to deposit margins improvement in UK PBB, and CFG’s balance sheet growth. Net interest margin increased 24 basis points to 2.32%, driven from deposit re-pricing in UK PBB and Private Banking.
Non-interest income came in at £945 million ($1.5 billion), down 19.4% year over year. The decline primarily reflected reduction in income from trading activities along with net fees and commissions.
Operating expenses totaled £4.9 billion ($7.8 billion), down 29% year over year. Adjusted operating expenses, excluding restructuring and litigation and conduct costs were down 18.4% to £3.1 billion ($4.9 billion). The decline was attributed to lower operating expenses across a number of businesses, mainly CIB. Moreover, adjusted cost to income ratio improved to 81% from 97%.
Loan impairment releases were £623 million ($986 million) as against loss of £5.1 billion ($8.3 billion) in the prior-year period.
Balance Sheet
As of Dec 31, 2014, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £697 billion ($1.08 trillion), down slightly from £740 billion ($1.22 trillion) as of Dec 31, 2013. Total assets were £1,051 billion ($1.63 trillion), up from £1,028 billion ($1.69 trillion) as of Dec 31, 2013.
Net loans and advances to customers were £334 billion ($519 billion), down from £391 billion ($645 billion) as of Dec 31, 2013. Loan to deposit ratio was 95% compared with 94% as of Dec 31, 2013.
As of Dec 31, 2014, Common Equity Tier 1(CET) ratio was 11.1%, compared with 8.6% as of Dec 31, 2013. RBS continues to target to move toward a fully loaded Basel III CET1 ratio of 13% by 2015-end.
Risk-weighted assets came in at £356 billion ($553 billion), down from £429 billion ($707 billion) as of Dec 31, 2013.
Outlook
The ongoing economic recovery in the UK and Irish markets is expected to continue, though the pace will be slightly slow in 2015. Management does not expect the significant impairment recoveries recorded in 2014 in Ulster Bank and RCR to continue in 2015.
CIB segment income is expected to decline substantially. CIB’s geographical footprint is expected to reduce to about 13 countries compared with 38 at the end of 2014. Moreover, CIB’s RWAs will be reduced by 60% from £107 billion as of Dec 31, 2014 to £35–£40 billion in 2019, with more than £25 billion reduction expected in 2015. Further, third-party assets will be reduced from £241 billion at the end of 2014 to £75–£80 billion in 2019.
Based on cost reduction efforts, management is targeting reductions of £800 million in 2015 in operating expenses. However, management expects higher litigation costs.
Management anticipates RWAs to be less than £300 billion by 2015-end, attributed to RCR and CIB run-offs and the partial de-consolidation of Citizens.
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 the plausible concerns, ongoing restructuring will help counter some of the challenges.
Shares of RBS currently carry a Zacks Rank #3 (Hold).
Competitive Landscape
Deutsche Bank AG (DB) reported net income of €441 million ($551 million) in the fourth quarter of 2014, as against loss of €1.37 billion ($1.86 billion) in the prior-year quarter. Notably, in the reported quarter, the bank recorded income tax benefit of €189 million ($236 million), primarily due to changes in the recognition and measurement of deferred taxes.
Mitsubishi UFJ Financial Group Inc. (MTU) reported net income of ¥926.9 billion ($8.71 billion) for nine months (ended Dec 31) of fiscal year ending Mar 31, 2015, up from net income of ¥785.4 billion ($7.93 billion) in the year-ago period. For the period under review, rise in net interest income and fee revenues were the tailwinds. Further, increased gross profits along with strong loan and deposit growth were the positives. However, increase in G&A expenses negatively impacted the results.
Driven by strong top-line performance, Brazil’s Itau Unibanco Holding S.A. (ITUB) reported fourth-quarter 2014 recurring earnings of R$5.7 billion ($2.24 billion), up 21.3% year over year. Including non-recurring items, net income came in at R$5.5 billion ($2.16 billion), up 19.6% year over year. The year-over-year rise was primarily attributed to increased operating revenues, elevated managerial financial margin along with higher banking service fees and income from banking charges. However, elevated non-interest expenses were the headwind.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment