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Royal Bank of Scotland (RBS) Posts Impressive Q2 Earnings

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The Royal Bank of Scotland Group plc (RBS - Free Report) reported second-quarter 2017 profit attributable to its shareholders of £680 million ($869.3 million) as compared with the loss of £1.08 billion witnessed in the prior-year quarter.

Elevated net interest and non-interest income were tailwinds. Further, contraction in adjusted operating expenses displayed prudent expense management.

Operating profit totaled £1.24 billion ($1.59 billion), as compared with the loss of £695 million incurred in the year-ago quarter. The profit resulted from reduced restructuring charges, and litigation and conduct costs. Adjusted operating profit, excluding certain items, more than doubled to £1.69 billion ($2.16 billion) on a year-over-year basis.

Furthermore, division wise, Personal & Business Banking (PBB) and Central items segments reported operating profit in the reported quarter, as compared with loss in the prior-year period. Commercial & Private Banking (CPB), NatWest Markets and Williams & Glyn segments reported profits in both the reported and the prior-year quarter.

RBS Capital Resolution (RCR), created in Jan 2014, reported an operating loss of £388 million ($496 million), as compared with a loss of £612 million in the year-earlier quarter.

Revenue Escalated; Effective Cost Control

Net interest income climbed 2.8% on a year-over-year basis to £2.24 billion ($2.86 billion) in the reported quarter, attributed to rise in almost all units. Net interest margin contracted 8 basis points to 2.13%, displaying asset margin pressure impact and mix impacts across the core businesses.

Non-interest income came in at £1.47 billion ($1.88 billion), surging 78.5% year over year. The rise primarily reflected income from trading activities and elevated other operating income.

Operating expenses totaled £2.4 billion ($3.1 billion), plunging 31.4% year over year. Adjusted operating expenses, excluding restructuring costs, litigation and conduct costs were up slightly to £1.8 billion ($2.3 billion). Moreover, adjusted cost to income ratio decreased to 50.7% from 66.6% in the prior-year quarter.

Loan impairment losses were £70 million ($89.5 million), as compared with £186 million in the year-ago quarter.

Strong Capital Position

As of Jun 30, 2017, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £589.1 billion ($764.0 billion), up from £551.7 billion ($678.7 billion) as of Dec 31, 2016. Total assets were £782.7 billion ($1.02 trillion), down from £798.7 billion ($982.5 billion) as of Dec 31, 2016.

Net loans and advances to customers were £326.1 billion ($422.9 billion), up from £323.0 billion ($397.3 billion) as of Dec 31, 2016. Loan to deposit ratio was 91%, in line with the figure as of Dec 31, 2016.

As of Jun 30, 2017, Common Equity Tier 1(CET) ratio was 14.8% compared with 13.4% as of Jun 30, 2016.

Risk-weighted assets came in at £215.4 billion ($279.3 billion), down 5.6% year over year.

Outlook

For 2017, a set of targets has been committed by the bank.

Management maintains the CET1 ratio projection at 13%. Based on cost-reduction efforts, management is targeting reductions of £750 million in 2017 in operating expenses.

Net growth of 3% is anticipated in PBB and CPB customer loans.

Excluding RBS’s stake in Alawwal Bank, management expects Capital Resolution RWAs will be at the lower end of the previous £15–£20 billion guidance for the end of 2017. It is anticipated Capital Resolution disposal losses will be significantly higher in the second half of 2017, at around £0.7 billion.

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 plausible concerns, the ongoing restructuring measures will help counteract some of the challenges.

RBS currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Deutsche Bank AG (DB - Free Report) reported net income of €466 million ($512.4 million) in second-quarter 2017, significantly up on a year-over-year basis. Income before income taxes more than doubled to €822 million ($903.9 million) on a year-over-year basis. Cost management and reduction in provisions were positive factors. However, lower revenues due to trading slump were an undermining factor. Notably, net new money inflows were recorded during the quarter.

UBS Group AG (UBS - Free Report) reported second-quarter 2017 pre-tax operating profit of CHF 1.68 billion ($1.71 billion) on an adjusted basis, up around 1% from the prior-year quarter. Results displayed increase in net interest income (up 22% year over year), along with net fee and commission income (up 5% year over year), partially offset by lower trading income (down 23% year over year). Notably, the quarter benefited from the company’s consistent focus on expense management.

Itau Unibanco Holding S.A. (ITUB - Free Report) posted recurring earnings of R$6.2 billion ($1.9 billion) in second-quarter 2017, up 10.7% year over year. Including non-recurring items, net income came in at R$6.0 billion ($1.87 billion), up 9.1% year over year. Results displayed a decrease in revenues and a solid balance-sheet position. Higher expenses and lower managerial financial margin were headwinds.

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