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RBS Earnings Improve Sequentially

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The Royal Bank of Scotland Group plc’s (RBS - Free Report) first-quarter 2013 (ended Mar 31, 2013) net operating income came in at £829 million ($1,095 million). This reflects a substantial rise of 49.9% from £553 million ($730 million) in the prior quarter.

Core operating income stood at £1,334 million ($1,762 million), down 10.8% sequentially. Further, non-core operating loss came in at £505 million ($667 million), down 46% sequentially.

The results reflect an improvement in the core bank’s operating results and further reduction in operating losses, partially offset by a decline in net interest income. However, increase in operating expenses depicts poor expense management.

Furthermore, division-wise, on a sequential basis, Retail & Commercial reported a 13.7% fall in operating profit to £1,594 million ($2,105 million) and Direct Line Group recorded a 21.2% decrease to £89 million ($118 million). However, the Market division reported a rise of 82.6% to £294 million ($388 million). Central items reported an operating loss of £43 million ($57 million) compared with a profit of £126 million ($166 million) in the prior quarter.

Performance in Detail

Net interest income fell 3.5% on a sequential basis to £2,737 million ($3,615 million). The decline was driven by reduced day count. Net interest margin was 1.95%, in line with the prior quarter.

Non-interest income came in at £3,543 million ($4,679 million), up 7.2% sequentially.
Operating expenses for the quarter totaled £3,639 million ($4,806 million), up 12.6% from the prior quarter. The rise in expenses was mainly driven by an increase in staff expenses. Moreover, core cost to income ratio deteriorated from 57% in the prior quarter to 64%.
Loan impairment losses were £1,036 million ($1,368 million), down 26.1% sequentially. This was led by a 17.8% dip in loan impairments in the core portfolio to £599 million ($791 million) and a drop in the non-core portfolio by 35.1% to £437 million ($577 million).

Balance Sheet

As of Mar 31, 2013, funded balance sheet was £876 billion ($1,436 billion), up £6 billion ($8 billion) sequentially. The rise was driven by higher central bank deposits within Group Treasury and a recovery in market counterparty positions. Total assets stood at £1,308 billion ($1,676 billion), down 0.3% sequentially.

Loans and advances to customers rose 0.23% sequentially to £433 billion ($555 billion), driven by a £3 billion ($4 billion) increase in US R&C, partially offset by run-off and disposals in non-core. Loan to deposit ratio improved from 100% to 99% in the quarter.
Capital ratios

As of Mar 31, 2013, core tier 1 ratio stood at 10.8%, compared with 10.3% in the prior quarter. Gross risk weighted assets came in at £446 billion ($572 billion), down 3.0% sequentially from £460 billion ($590 billion). The decline reflects a £13 billion reduction in markets and a £6 billion decrease in non-core.


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 cautious expense management initiatives.

RBS expects trends in Core Retail & Commercial businesses to be consistent with the first quarter. Moreover, net interest margin is expected remain somewhat stable compared with the prior quarter.

Performance of Other Foreign Banks

Deutsche Bank AG’s (DB - Free Report) earnings per share came in at €1.71 in the first quarter of 2013, compared with a loss of €2.31 in the prior quarter and year-ago earnings of €1.45. Net income came in at €1.7 billion ($1.3 billion), up from €1.4 billion ($1.1 million) in the prior-year quarter. The quarterly performance was driven by higher revenues and lower expenses.

UBS AG (UBS - Free Report) reported first-quarter 2013 net income attributable to shareholders of CHF 988 million ($1,062.3 million), which substantially outpaced the prior-quarter’s loss of CHF 1.9 billion ($2.0 billion). The positive quarterly results were primarily impacted by lower net charges for provisions for litigation and regulatory matters and reduced own credit loss.

ICICI Bank Ltd.’s (IBN - Free Report) ) fiscal fourth-quarter 2013 (ended Mar 31) net profit came in at INR23.04 billion ($424 million). This reflects a rise of 21% from the year-ago profit of INR19.02 billion ($350 million). For fiscal 2013, net income reached INR83.25 billion ($1.5 billion), up 29% from INR64.65 billion ($1.2 billion) in fiscal 2012.The robust performance came on the back of an augmented net interest income and lower loan loss provisions, partially offset by a rise in operating expenses and a decrease in fee income.

Our Viewpoint

We expect RBS’ diversified business model and sound financial position to contribute to its overall growth in the future. However, increased competition, volatility in the global economy and effects of the Eurozone crisis remain major concerns.

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

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