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The Royal Bank of Scotland Group plc's (RBS - Snapshot Report) share price tumbled 1.84% to $10.65, following the reported loss in third-quarter 2013. Third-quarter 2013 loss from continuing operations came in at £715 million ($1,108 million), as compared with the loss of £1,371 million ($2,165 million) in the prior-year quarter.

The results reflect lower net interest income and non-interest income, partially offset by a fall in loan impairment losses. However, reduced operating expenses were a tailwind.

Core operating income came in at £1,283 million ($1988 million), down 14% year over year. The decline was attributed to the ongoing strategic contraction of the Markets business. However, non-core operating loss came in at £845 million ($1,309 million) compared with the loss of £586 million ($926 million) in the prior-year quarter.

Furthermore, division-wise, on a year-over-year basis, Retail & Commercial, Central items and Markets division reported a 10.7%, 68.5% and 27.7% fall, respectively in operating profit.

Performance in Detail

Net interest income dipped 1.0% on a year-over-year basis to £2,783 million ($4,312 million). Non-interest income came in at £2,111 million ($3,271 million), down 23.2% year over year. The decline was driven by targeted reduction in markets balance sheet and risk-weighted assets.

Operating expenses for the quarter totaled £3,286 million ($5,091 million), down 5.4% over the prior-year quarter. However, core cost to income ratio deteriorated to 63% from 59% in the prior-year quarter, mainly due to weaker income in markets.

Loan impairment losses were £1,120 million ($1,735 million), down 5.3% year over year. This was primarily led by a 22.2% decrease in loan impairments in the core portfolio.

Balance Sheet

As of Sep 30, 2013, RBS exhibited a strong capital position.  Funded assets stood at £805.8 billion ($1,300 billion), down 7.4% over the nine months period. Total assets were £1,129 billion ($1,822 billion), down 13.9% from £1,312 billion ($2,119 billion) as of Dec 31, 2012.

Loans and advances to customers were £408 billion ($658 billion), down 5.6% over the nine months period. Loan to deposit ratio was 94% as compared with 100% in the prior-year quarter.
 
Capital ratios

As of Sep 30, 2013, core Tier 1 ratio was 11.6%, compared with 10.3% as of Dec 31, 2012. On a fully applied Basel III basis, the core Tier 1 ratio was 11.7%. Risk-weighted assets came in at £410 billion ($662 billion), down 10.9% from £460 billion ($743 billion) as of Dec 31, 2012. Tier 1 leverage ratio stood at 14.0x compared with 15.0x as of Dec 31, 2012.

Outlook

Though economic recovery in the UK is visible, management anticipates the subdued performance from core businesses to continue in the short term. Further, it expects Markets performance to be seasonally good in the fourth quarter.

Margins are expected to be stable or slightly up and underlying cost base to stand at £13 billion for 2013 (excluding penalties and fines).

On the application of new strategy for high risk assets, management anticipates a significant increase in impairments in fourth-quarter 2013, which might result in RBS reporting substantial loss for the full-year 2013.

Performance of Other Foreign Banks

Deutsche Bank AG (DB - Analyst Report) reported net income of €51 million ($67.5 million) in the third quarter of 2013, down from €754 million ($998.6 million) in the prior-year quarter. Results suffered due to litigation related expenses.

UBS AG reported third-quarter 2013 net income attributable to shareholders of CHF 577 million ($619.1 million), which substantially lagged the prior-quarter’s income of CHF 690 million ($731.8 million). The quarterly results were impacted by net charges for provisions for litigation, regulatory and similar matters worth CHF 586 million ($628.7 million), partially offset by a net tax benefit of CHF 222 million ($238.2 million).

Barclays PLC (BCS - Analyst Report) reported adjusted net income of £3,418 million ($5,285 million) for the first nine months of 2013. This reflected a 21% decline from the prior-year period level. Results were adversely affected by a fall in net operating income, partially benefiting from a decline 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 counter some of the challenges, increased competition, volatility in the global economy and the new regulations will remain plausible concerns.

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

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