The Royal Bank of Scotland Group plc
) share price jumped 7.89% to $11.21, following the impressive
earnings in first-quarter 2014. First-quarter 2014 profit from
continuing operations came in at £1.28 billion ($2.12 billion),
rising more than twofold from £476 million ($739.4 million) in
the prior-year quarter.
Results were positively driven by lower loan impairment losses
and reduced operating expenses. Additionally, the results
reflected higher net interest income. However, reduced
non-interest income was on the downside.
Operating income almost doubled to £1.5 billion ($2.5 billion) on
a year-over-year comparison. The rise was attributed to the lower
Furthermore, division-wise, in the first quarter, Central items
division reported operating loss of £75 million ($124 million),
while other segments reported operating profits. RBS Capital
Resolution (RCR), created in Jan 2014, reported operating loss of
£6 million ($9.9 million).
Performance in Detail
Net interest income inched up 1.0% on a year-over-year basis to
£2,698 million ($4,465 million) in the first quarter. Group net
interest margin increased 18 basis points to 2.12%, driven by
repricing activities across a number of divisions.
Non-interest income came in at £2,355 million ($3,897 million),
down 5.4% year over year. The decline reflected de-risking
activities in the Markets division. Moreover, US Retail &
Commercial divisions recorded reduced fee income due to slower
mortgage refinancing activity and lower deposit fees in the
quarter, partially offset by elevated income in UK Retail and UK
Operating expenses for the quarter totaled £3,190 million ($5,279
million), down 5.6% over the prior-year quarter, mainly due to
lower administrative expenses. Further, planned cost reduction
initiatives in the retail & commercial banking businesses
along with re-sizing of the Markets division were the positives.
Moreover, cost to income ratio improved to 63% from 66%.
Loan impairment losses decreased 65.3% to £360 million ($596
million) from the prior-year quarter. This was primarily led by
improvement in all portfolios.
As of Mar 31, 2014, RBS exhibited a strong capital position.
Funded assets stood at £746 billion ($1,241 billion), down 14.8%
year over year. Total assets were £1,024 billion ($1,704
billion), down 21.7% year over year.
Loans and advances to customers were £443 billion ($737 billion),
down 10% year over year. Loan to deposit ratio was 97% compared
with 99% in the prior-year quarter.
As of Mar 31, 2014, Common Equity Tier 1(CET) ratio was 9.4%
(transitional PRA basis), compared with 8.6% as of Dec 31, 2013.
RBS continues to target a fully loaded Basel III CET1 ratio of
11% by the end of 2015 and 12% or above by the end of 2016.
Risk-weighted assets came in at £414.3 billion ($689 billion),
down 3.4% sequentially.
Outlook for 2014
With the ongoing economic recovery in the UK, management
anticipates modest increase in the net interest margin in the
upcoming quarters. With credit trends being favorable in the
first quarter, impairment losses on UK and Irish portfolios,
excluding RCR, are anticipated to improve in 2014.
Margins are expected to be slightly up and strategic initiatives
to result in cost reductions and improve efficiency in 2014.
Though full implementation of these actions will take two to
three years, management anticipates the underlying cost base to
be lower by £1 billion in 2014.
Sale of Interest in Direct Line Group (DLG)
During the quarter, RBS completed the sale of residual interest
of 423.2 million ordinary shares in DLG. The shares were
sold at a price of £2.63 pence per share yielding gross proceeds
of £1,113 million and realizing a gain of £191 million. Notably,
this sale excludes 4.2 million shares vested by RBS to Direct
Line Group management as long-term incentive plan awards.
Performance of Other Foreign Banks
Impacted by a disappointing top-line performance,
Deutsche Bank AG
) reported net income of €1.1 billion ($1.5 billion) in the first
quarter of 2014, down from €1.7 billion ($2.2 million) in the
prior-year quarter. However, decreased expenses, lower provision
for credit losses and a strong capital position were the
Itau Unibanco Holding S.A.
) reported first-quarter 2014 recurring earnings of R$4.5 billion
($1.90 billion), up 29% year over year. Including non-recurring
items, net income came in at R$4.4 billion ($1.86 billion), up
25.7% year over year. The year-over-year increase was primarily
attributed to reduced expenses for provision of loan and lease
losses and increased managerial financial margin along with
higher banking service fees and income from banking charges.
Another foreign bank -
) will report first-quarter 2014 results on May 6.
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 #4 (Sell).
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