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Royal Bank of Scotland (RBS) Stock Down 5.93% on Q2 Loss
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Shares of The Royal Bank of Scotland Group plc declined 5.93% on NYSE after it reported second-quarter 2016 loss attributable to its shareholders of £1.08 billion ($1.55 billion). The company had posted a profit of £280 million in the prior-year quarter.
Reduced net interest and non-interest income was a major drag. However, adjusted operating expenses decreased due to prudent expense management.
Operating loss totaled £695 million ($996.9 million). The company had recorded a profit of £224 million in the prior-year quarter. The loss stemmed from restructuring charges and litigation and conduct costs along with loss on redemption of own debt and strategic disposals. Adjusted operating profit, excluding certain items came in at £716 million ($1.03 billion), down 53.4% on a year-over-year basis.
Division wise, Personal & Business Banking ("PBB") and Central items segments reported operating loss in the quarter as against profit in the prior-year period. Commercial & Private Banking ("CPB") and Williams & Glyn segments posted profits in both the reported and the prior-year quarters. Notably, Corporate & Institutional Banking (CIB) reported profit in the second quarter. This division had incurred loss in the prior-year quarter.
RBS Capital Resolution (RCR), created in Jan 2014, reported an operating loss of £612 million ($877.8 million), substantially narrower than a loss of £815 million in the prior-year quarter.
Though the divestment of the Williams & Glyn business was in full swing, the process is not expected to be completed even by the end of 2017 due to some complexities in the customer and product mix of the business along with the aim to form a cloned banking platform. Consequently, management is looking for alternatives for divestment.
Net interest income was down 1.7% on a year-over-year basis to £2.2 billion ($3.16 billion) in the reported quarter due to the winding down of Capital Resolution. Net interest margin expanded 8 basis points to 2.21% supported by the benefit in reductions in the low yielding non-core assets.
Non-interest income came in at £823 million ($1.18 billion), down 45.9% year over year. The decline primarily stemmd from lower income by Capital Resolution due to asset disposal and increased charges from volatile items under IFRS.
Operating expenses totaled £3.5 billion ($5.02 billion), down 5.4% year over year. Adjusted operating expenses, excluding restructuring costs, litigation and conduct costs were down 18.2% to £1.8 billion ($2.58 billion). Moreover, adjusted cost to income ratio increased to 67% from 62% in the prior-year quarter.
Loan impairment losses were £186 million ($266.8 million) compared with releases of £192 million in the prior-year quarter.
Strong Capital Position
As of Jun 30, 2016, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £575.6 billion ($771.0 billion), up from £552.9 billion ($819.6 billion) as of Dec 31, 2015. Total assets were £901.6 billion ($1.21 trillion), up from £815.4 billion ($1.2 trillion) as of Dec 31, 2015.
Net loans and advances to customers were £326.5 billion ($437.3 billion), up from £306.3 billion ($454 billion) as of Dec 31, 2015. Loan to deposit ratio was 92% compared with 89% as of Dec 31, 2015.
As of Jun 30, 2016, Common Equity Tier 1(CET) ratio was 14.5% compared with 15.5% as of Dec 31, 2015.
Risk-weighted assets came in at £245.2 billion ($328.4 billion), up from £242.6 billion ($359.6 billion) as of Dec 31, 2015.
Outlook
For 2016, a set of targets has been updated by the bank following the EU Referendum result.
Management maintains the CET1 ratio projection at 13%. Based on cost-reduction efforts, management is targeting reductions of £800 million in 2016 in adjusted operating expenses.
Income at the PBB and CPB segments are anticipated to be stable in 2016 compared with 2015 as balance sheet growth, mainly in mortgages and core commercial lending, is neutralized by headwinds from reduced interchange fees, low interest rates and the uncertain macroeconomic environment. However, net growth of 4% is expected in PBB and CPB customer loans.
Impairments on core portfolios are projected to remain modest in 2016.
Further, management expects restructuring costs to remain high in 2016, totaling over £1 billion.
Management anticipates Capital Resolution disposal losses of about £1.5 billion over the period 2015–2019. While the company took a loss of £367 million in 2015, most of the remaining losses are expectd to be incurred this year. Following the EU Referendum and the resultant significant weakening of sterling, management expects Capital Resolution RWAs to be around £30– £35 billion by the end of 2016.
Our Viewpoint
We expect RBS’ diversified business model and its sound financial position to contribute to overall growth, going forward. Though increased competition, volatility in the global economy, litigation costs and new regulations will remain the plausible concerns, the ongoing restructuring measures will help counteract some of the challenges.
The company currently carries a Zacks Rank #3 (Hold).
Competitive Landscape
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in second-quarter 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year. Lower revenues and higher provisions hurt the results. However, the reduction in non-interest expenses was a positive factor.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to its shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially neutralized by a 15% increase in net trading income.
Brazil’s Itau Unibanco Holding S.A. (ITUB - Free Report) posted second-quarter 2016 recurring earnings of R$5.58 billion ($1.59 billion), down 9% year over year. Including non-recurring items, net income came in at R$5.52 billion ($1.57 billion), down 7.7% year over year.
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Royal Bank of Scotland (RBS) Stock Down 5.93% on Q2 Loss
Shares of The Royal Bank of Scotland Group plc declined 5.93% on NYSE after it reported second-quarter 2016 loss attributable to its shareholders of £1.08 billion ($1.55 billion). The company had posted a profit of £280 million in the prior-year quarter.
Reduced net interest and non-interest income was a major drag. However, adjusted operating expenses decreased due to prudent expense management.
Operating loss totaled £695 million ($996.9 million). The company had recorded a profit of £224 million in the prior-year quarter. The loss stemmed from restructuring charges and litigation and conduct costs along with loss on redemption of own debt and strategic disposals. Adjusted operating profit, excluding certain items came in at £716 million ($1.03 billion), down 53.4% on a year-over-year basis.
Division wise, Personal & Business Banking ("PBB") and Central items segments reported operating loss in the quarter as against profit in the prior-year period. Commercial & Private Banking ("CPB") and Williams & Glyn segments posted profits in both the reported and the prior-year quarters. Notably, Corporate & Institutional Banking (CIB) reported profit in the second quarter. This division had incurred loss in the prior-year quarter.
RBS Capital Resolution (RCR), created in Jan 2014, reported an operating loss of £612 million ($877.8 million), substantially narrower than a loss of £815 million in the prior-year quarter.
Though the divestment of the Williams & Glyn business was in full swing, the process is not expected to be completed even by the end of 2017 due to some complexities in the customer and product mix of the business along with the aim to form a cloned banking platform. Consequently, management is looking for alternatives for divestment.
Net interest income was down 1.7% on a year-over-year basis to £2.2 billion ($3.16 billion) in the reported quarter due to the winding down of Capital Resolution. Net interest margin expanded 8 basis points to 2.21% supported by the benefit in reductions in the low yielding non-core assets.
Non-interest income came in at £823 million ($1.18 billion), down 45.9% year over year. The decline primarily stemmd from lower income by Capital Resolution due to asset disposal and increased charges from volatile items under IFRS.
Operating expenses totaled £3.5 billion ($5.02 billion), down 5.4% year over year. Adjusted operating expenses, excluding restructuring costs, litigation and conduct costs were down 18.2% to £1.8 billion ($2.58 billion). Moreover, adjusted cost to income ratio increased to 67% from 62% in the prior-year quarter.
Loan impairment losses were £186 million ($266.8 million) compared with releases of £192 million in the prior-year quarter.
Strong Capital Position
As of Jun 30, 2016, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £575.6 billion ($771.0 billion), up from £552.9 billion ($819.6 billion) as of Dec 31, 2015. Total assets were £901.6 billion ($1.21 trillion), up from £815.4 billion ($1.2 trillion) as of Dec 31, 2015.
Net loans and advances to customers were £326.5 billion ($437.3 billion), up from £306.3 billion ($454 billion) as of Dec 31, 2015. Loan to deposit ratio was 92% compared with 89% as of Dec 31, 2015.
As of Jun 30, 2016, Common Equity Tier 1(CET) ratio was 14.5% compared with 15.5% as of Dec 31, 2015.
Risk-weighted assets came in at £245.2 billion ($328.4 billion), up from £242.6 billion ($359.6 billion) as of Dec 31, 2015.
Outlook
For 2016, a set of targets has been updated by the bank following the EU Referendum result.
Management maintains the CET1 ratio projection at 13%. Based on cost-reduction efforts, management is targeting reductions of £800 million in 2016 in adjusted operating expenses.
Income at the PBB and CPB segments are anticipated to be stable in 2016 compared with 2015 as balance sheet growth, mainly in mortgages and core commercial lending, is neutralized by headwinds from reduced interchange fees, low interest rates and the uncertain macroeconomic environment. However, net growth of 4% is expected in PBB and CPB customer loans.
Impairments on core portfolios are projected to remain modest in 2016.
Further, management expects restructuring costs to remain high in 2016, totaling over £1 billion.
Management anticipates Capital Resolution disposal losses of about £1.5 billion over the period 2015–2019. While the company took a loss of £367 million in 2015, most of the remaining losses are expectd to be incurred this year. Following the EU Referendum and the resultant significant weakening of sterling, management expects Capital Resolution RWAs to be around £30– £35 billion by the end of 2016.
Our Viewpoint
We expect RBS’ diversified business model and its sound financial position to contribute to overall growth, going forward. Though increased competition, volatility in the global economy, litigation costs and new regulations will remain the plausible concerns, the ongoing restructuring measures will help counteract some of the challenges.
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The company currently carries a Zacks Rank #3 (Hold).
Competitive Landscape
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in second-quarter 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year. Lower revenues and higher provisions hurt the results. However, the reduction in non-interest expenses was a positive factor.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to its shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially neutralized by a 15% increase in net trading income.
Brazil’s Itau Unibanco Holding S.A. (ITUB - Free Report) posted second-quarter 2016 recurring earnings of R$5.58 billion ($1.59 billion), down 9% year over year. Including non-recurring items, net income came in at R$5.52 billion ($1.57 billion), down 7.7% year over year.
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