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Royal Bank of Scotland (RBS) Reports Decline in Q1 Earnings

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The Royal Bank of Scotland (RBS - Free Report) reported first-quarter 2019 net income attributable to its shareholders of £707 million ($919 million), down 12.5% from £808 million ($1.1 billion) witnessed in the prior-year quarter. Operating income totaled £1 billion ($1.3 billion) compared with £1.2 billion ($1.6 billion in the year-ago quarter.

First-quarter results were impacted by decline in revenues. Also, contraction of net interest margin was a headwind. However, lower operating expenses displayed prudent cost management. Higher loans and strong capital position were other positives.

Division wise, the NatWest Markets segment incurred operating loss in the first quarter against the profit a year ago. The RBS International, Commercial & Private Banking and Personal & Ulstersegments recorded profits in both the reported and the prior-year quarter.

Margin Pressure Persists, Cost Control Effective

Net interest income dipped 5.3% on a year-over-year basis to £2 billion ($2.6 billion) in the first quarter. Net interest margin contracted 15 basis points to 1.89%, displaying competitive pressure on margin.

Non-interest income came in at £1 billion ($1.3 billion), down 13.1% year over year. The decline primarily reflected own credit adjustments and lower other income.

Operating expenses totaled £1.9 billion ($2.5 billion), down 3.6% year over year. The decline reflects RBS’ prudent cost savings plan. The company stated that it achieved £45 million reduction in the quarter of £300 million target for 2019. However, cost to income ratio increased to 63.4% from 60.5%.

Loan impairment losses were £86 million ($111 million) compared with £78 million in the year-earlier quarter.

Strong Capital Position

As of Mar 31, 2019, RBS exhibited a strong capital position. Funded assets came in at £585.1 billion ($762 billion), up from £560.9 billion ($730 billion) as of Dec 31, 2018. Total assets were £719.1 billion ($936.4 billion), up from £694.2 billion ($904 billion), sequentially.

Loans to customers (amortised cost) were £306.4 billion ($399 billion), up from £305.1 billion ($397.3 billion) as of Dec 31, 2018. Loan to deposit ratio was 86% compared with 85% in prior quarter.

As of Mar 31, 2019, Common Equity Tier 1(CET) ratio was 16.2% compared with 16.4% as of Mar 31, 2018.

Risk-weighted assets came in at £190.8 billion ($248.6 billion), down 5.9% year over year.

Our Viewpoint

We expect RBS’ diversified business model and sound financial position to be conducive to overall growth in the near term. Though heightened competition, volatility in the global economy, litigation costs and new regulations remain plausible concerns, the bank’s ongoing restructuring measures will likely mitigate some of these challenges.

Royal Bank Scotland PLC (The) Price and Consensus

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

Competitive Landscape

Barclays (BCS - Free Report) reported first-quarter 2019 net income attributable to ordinary equity holders of £1.04billion ($1.36 billion). This reflects improvement from net loss of £764 million ($1.01 billion) incurred in the prior-year quarter.

Among other foreign banks, HSBC Holdings plc (HSBC - Free Report) will release March-ended quarter numbers on May 3. Mitsubishi UFJ Financial Group (MUFG - Free Report) will report results on May 21.

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