Royal Bank of Scotland Group plc RBS reported loss for first-quarter 2015. Loss attributable to shareholders came in at £446 million ($719 million) compared with a profit of £1.2 billion ($1.9 billion) in the prior-year period.
Results reflected a rise in net interest income, more than offset by a fall in non-interest income, and higher restructuring, litigation and conduct costs. Moreover, operating expenses escalated during the quarter.
Operating profit was £325 million ($524 million), compared with £1.3 billion ($2.1 billion) in the prior-year quarter. The fall was due to reduced impairments as well as litigation and conduct charges. Adjusted operating profit, excluding restructuring, and litigation and conduct costs, improved 16% on a year-over-year basis to £1.6 billion ($2.6 billion).
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 the reported as well as the year-ago quarter.
RBS Capital Resolution (“RCR”), created in Jan 2014, reported operating profit of £181 million ($292 million), while Citizens Financial Group (CFG) reported operating profit of £257 million ($414 million).
Performance in Detail
Net interest income inched up 2.1% on a year-over-year basis to £2.8 billion ($4.5 billion), attributed to improvement in deposit margins of UK PBB, and CFG’s balance-sheet growth. Moreover, net interest margin increased 14 basis points to 2.26%.
Non-interest income came in at £1.6 billion ($2.6 billion), down 33.1% year over year. The decline primarily reflected a reduction in income from trading activities along with net fees and commissions.
Operating expenses totaled £4.1 billion ($6.6 billion), up 20.2% year over year. Adjusted operating expenses, excluding restructuring and litigation and conduct costs, were down 15% to £2.8 billion ($4.5 billion). The decline was attributed to a decrease in headcount. Moreover, adjusted cost to income ratio improved modestly to 64% from 65%.
Loan impairment releases were £91 million ($146 million) as against loss of £362 million ($584 million) in the prior-year period.
Balance Sheet
As of Mar 31, 2015, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £714 billion ($1.06 trillion), up 2.4% from £697 billion ($1.03 trillion) as of Dec 31, 2014. Total assets were £1,104 billion ($1.59 trillion), up from £1,050 billion ($1.51 trillion) as of Dec 31, 2014.
Net loans and advances to customers were £333 billion ($479 billion), down from £334.2 billion ($480.5 billion) as of Dec 31, 2015. Loan to deposit ratio was 95%, same as of Dec 31, 2014.
As of Mar 31, 2015, Common Equity Tier 1 (CET) ratio was 11.5%, compared with 11.1% as of Dec 31, 2014. RBS remains steady in its target to achieve a fully loaded Basel III CET1 ratio of 13% by 2015-end.
Risk-weighted assets came in at £348.6 billion ($501.2 billion), down from £355.9 billion ($5118 billion) as of Dec 31, 2014.
Outlook
Management reiterated its previous outlook. The ongoing economic recovery in the UK and Irish markets is expected to continue in 2015, albeit at a slower pace. Management, however, does not expect the significant impairment recoveries recorded in 2014 in Ulster Bank and RCR to continue in 2015.
CIB segment income is anticipated to decline substantially. CIB’s geographical footprint is projected 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 of reduction expected in 2015. Further, third-party assets will be reduced to £75–£80 billion in 2019 from £241 billion at the end of 2014.
Backed by cost-reduction efforts, the company aims to reduce £800 million in operating expenses for 2015. However, management predicts higher litigation costs for the year.
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 as plausible concerns, ongoing restructuring will help counter some of the challenges.
Competitive Landscape
Deutsche Bank AG DB reported net income of €559 million ($631 million) in the first quarter of 2015, down 49% year over year. The huge fine, stemming from Deutsche Bank’s settlement with the U.S. and British authorities to resolve charges over its alleged role in manipulation of the interbank offered rates benchmarks, eclipsed the strong revenue growth witnessed in the quarter. Also, the quarter recorded lower provision for credit losses.
Itaú Unibanco Holding S.A.
ITUB and Mitsubishi UFJ Financial Group, Inc. MTU are scheduled to report results on May 5 and May 15, respectively.
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