The Royal Bank of Scotland Group plc RBS reported second-quarter 2015 earnings attributable to shareholders of £293 million ($448.6 million) compared with £230 million ($387.3 million) in the prior-year comparable period.
Results were driven by profit from discontinued operations, reflecting an upswing in the market value of Citizens’ shares and elevated impairment releases. However, higher restructuring, litigation and conduct costs and reduced non-interest income were on the downside.
Operating profit was £304 million ($464.4 million), down 76.9% year over year. The reduction in profit resulted from high restructuring, litigation and conduct charges. Adjusted operating profit, excluding restructuring and litigation and conduct costs came in at £1.8 billion ($2.8 billion), down 10% on a year-over-year basis.
Furthermore, division-wise, Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and Central items segments reported operating profit in both the reported and prior-year period. Corporate & Institutional Banking (CIB) reported loss in this as well as the year-ago quarter.
RBS Capital Resolution (RCR), created in Jan 2014, reported operating profit of £176 million ($269.5 million), significantly up on a y/y basis, while Citizens Financial Group (CFG) reported a fall of 17.3% in operating profit.
Performance in Detail
Net interest income inched down 1% on a year-over-year basis to £2.8 billion ($4.3 billion) in the reported period, attributed to a decline in other portfolios, partially offset by asset growth in UK mortgages and Commercial Banking. Net interest margin increased 1 basis point to 2.23%, driven by deposit re-pricing, partially offset by continuing pressure on asset margins.
Non-interest income came in at £1.6 billion ($2.4 billion), down 25% year over year. The decline primarily reflected reduction in income from trading activities along with net fees and commissions. Moreover, the fall reflected reduction in CIB’s scale.
Operating expenses totaled £4.2 billion ($6.4 billion), up 14% year over year. Adjusted operating expenses, excluding restructuring and litigation and conduct costs were down 12% to £2.7 billion ($4.1 billion). The decline was attributed to lower staff expenses. Moreover, adjusted cost to income ratio remained stable at 62%.
Loan impairment releases were £141 million ($215.9 million), up 51.6% year over year.
Balance Sheet
As of Jun 30, 2015, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £682.8 billion ($1.07 trillion), down slightly from £697.2 billion ($1.08 trillion) as of Dec 31, 2014. Total assets were £964.7 billion ($1.52 trillion), down from £1,051 billion ($1.63 trillion) as of Dec 31, 2014.
Net loans and advances to customers were £315 billion ($495.1 billion), down from £334.3 billion ($519.2 billion) as of Dec 31, 2014. Loan to deposit ratio was 92% compared with 95% as of Dec 31, 2014.
As of Jun 30, 2015, Common Equity Tier 1(CET) ratio was 12.3%, compared with 11.2% as of Dec 31, 2014. 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 £326.4 billion ($513 billion), down from £355.9 billion ($552.8 billion) as of Dec 31, 2014.
Other Developments
Recently, with the target of divesting its entire stake in US retail bank – Citizens Financial Group, Inc. CFG – by the end of this year, RBS has declared an underwritten public offering to divest a further stake in Citizens. The latest announcement is the second initiative by RBS to divest shares this year, following Citizens’ much-hyped initial public offering in Sep 2014.
Royal Bank of Scotland looks forward to selling nearly 86 million shares of Citizens, with the over-allotment option granted to the underwriters for purchase of an additional 12.9 million shares. Gross proceeds are expected to be $2.2 billion (£1.4 billion) or $2.6 billion (£1.6 billion) if the over-allotment option is fully exercised.
Reportedly, Citizens Financial is expected to repurchase 9.6 million shares worth about $250 million of common shares from RBS later this year in August. Notably, after completion of all transactions, RBS’ stake will be reduced to 110.5 million shares or 20.9% of Citizens’ common stock. Further, RBS will record an estimated profit of £1.1 billion profit (including £0.9 billion reclassified from equity).
Notably, after the current stake sale, Royal Bank of Scotland does not require including Citizens Financial in its quarterly earnings report.
Outlook
The restructuring of CIB is expected to speed up during the second half of 2015, which would result in reduced revenues due to elevated disposal losses and higher restructuring costs.
Based on cost reduction efforts, management is targeting reductions of £800 million in 2015 in operating expenses.
Management anticipates RWAs to be less than £300 billion by 2015-end, attributed to RCR and CIB run-offs, £2 billion additional Tier 1 Securities (AT1) issuance and the 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 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
Other foreign banks that are expected to release results in the coming days include Itau Unibanco Holding S.A. ITUB and Mitsubishi UFJ Financial Group, Inc. MTU. Mitsubishi UFJ is scheduled to report June quarter-end results on Jul 31, while Itau Unibanco will report on Aug 4.
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