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The Royal Bank of Scotland Group plc’s (RBS - Snapshot Report) second-quarter 2013 (ended Jun 30, 2013) net operating income came in at £931 million ($1429.6 million), up 24.6% from £747 million ($1147.1 million) in the prior quarter.

The results reflect improvement in net interest income and non-interest income, partially offset by a rise in loan impairment losses. Total assets declined in the reported quarter accompanied by a fall in loans and advances. Moreover, higher operating expenses were a headwind.

Core operating income came in at £1,212 million ($1861.1 million), down 3.2% sequentially. Further, non-core operating loss came in at £281 million ($431.5 million), down 44.4% sequentially.

Notably, partial disposal of Direct Line Group (DLG) – RBS’ insurance division –decreased operating profit by £82 million ($125.9 million) in the prior quarter and by £71million ($109.0 million) in the reported quarter. Therefore, the results exclude DLG as operating segment.

Furthermore, division-wise, on a sequential basis, Retail & Commercial reported a 4.0% rise in operating profit to £1,658 million ($2546.0 million). Central items reported an operating profit of £137 million ($210.4 million) compared with a loss of £36 million ($55.3 million) in the prior quarter. However, the Market division reported a decline of 53.7% to £136 million ($208.8 million).

Performance in Detail

Net interest income rose 3.7% on a sequential basis to £2,770 million ($4253.6 million). The rise was driven by the one-off recovery in Non-Core and one extra day in the reported quarter, partially offset by lower average assets balance. Net interest margin was 2.00%, up 6 basis points (bps) from the prior quarter.

Non-interest income came in at £2,277 million ($3496.6 million), up 7.6% sequentially. Operating expenses for the quarter totaled £3,399 million ($5219.5 million), up 0.5% over the prior quarter. However, core cost to income ratio improved from 66% in the prior quarter to 62%.
 
Loan impairment losses were £1,125 million ($1727.6 million), up 8.6% sequentially. This was primarily led by a 19.8% increase in loan impairments in the core portfolio to £719 million ($1104.1 million).

Balance Sheet

As of Jun 30, 2013, funded balance sheet was £842.5 billion ($1281.3 billion), compared with £875.7 billion (1331.8 billion) as of Mar 31, 2013. Total assets were £1,216 billion ($1849.3 billion), down 7.0% sequentially.

Loans and advances to customers fell 3.0% sequentially to £420 billion ($638.7 billion), driven by a £6 billion ($9.1 billion) non-core run-off, lower collateral posting in markets of £5 billion ($7.6 billion), targeted reduction in the U.K. Corporate commercial property and shipping portfolios of £0.9 billion ($1.4 billion). Loan to deposit ratio improved from 99% to 96% in the quarter.
 
Capital ratios


As of Jun 30, 2013, core Tier 1 ratio was 11.1%, compared with 10.8% in the prior quarter. Gross risk weighted assets came in at £436 billion ($669.5 billion), down 2.2% sequentially from £445.8 billion ($684.6 billion).

Outlook

Management expects economic and regulatory challenges to continue through the remainder of 2013. Further, RBS aims to maintain a strong balance sheet and capital position along with prudent expense management initiatives. Notably, the company intends to supersede the set target of 9% Basel III Core Tier ratio by the end of 2013.

RBS expects trends in the Core Retail & Commercial business to be flexible with slight improvement in net interest margin.

Performance of Other Foreign Banks

Deutsche Bank AG’s (DB - Analyst Report) earnings per share came in at €0.32 ($0.42) compared with the year-ago number of €0.68 ($0.89). Net income came in at €335 million ($437 million), down from €666 million ($856 million) in the prior-year quarter. The quarterly performance came on the back of enhanced revenues and a strong capital position. However, these were partially offset by increased expenses as well as higher provision for credit losses.

UBS AG (UBS - Analyst Report) reported net income attributable to shareholders of CHF 690 million ($731.8 million), which significantly lagged the prior-quarter figure of CHF 988 million ($1,062 million). The quarterly results were primarily impacted by higher net charges for provisions for litigation and regulatory matters, along with an impairment of financial assets worth CHF 865 million ($917.4 million).

ICICI Bank Ltd.’s (IBN - Analyst Report)) fiscal first-quarter 2014 (ended Jun 30) net profit was INR22.74 billion ($383 million). This was up 25% from the year-ago profit of INR18.15 billion ($306 million). Results benefited from top-line growth, partially offset by higher loan loss provisions and a rise in operating expenses.   

Our Viewpoint

We expect RBS’ diversified business model and sound financial position to contribute to its overall growth going forward. Though ongoing restructuring will help in countering some of the challenges, increased competition, volatility in the global economy and the eurozone crisis will remain plausible concerns.

Shares of RBS currently carry a Zacks Rank #3 (Hold).

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