The Royal Bank of Scotland Group plc
) share price jumped 10.73% to $12.38, following the impressive
earnings for the six months ended Jun 30, 2014. First-half 2014
profit from continuing operations came in at £1.92 billion ($3.20
billion), rising more than twofold from £696 million ($1,074.9
million) in the prior-year comparable period.
Results were 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
Operating income more than tripled to £2.6 billion ($4.3 billion)
on a year-over-year comparison. The rise was attributed to the
lower impairment losses. Adjusted operating profit, excluding
restructuring and litigation and conduct costs more than doubled to
£3,365 million ($5,615.2 million) on a year-over-year basis.
Furthermore, division-wise, in the first half of 2014, Personal
& Business Banking segment's operating profit more than doubled
while Commercial & Private Banking segment reported a rise of
55.7% year over year. Further, Corporate & Institutional
Banking reported profit as compared with loss in the prior-year
period while Central items segment reflected a fall of 83.5% in
RBS Capital Resolution (RCR), created in Jan 2014, reported
operating loss of £48 million ($80.1 million), while Citizens
Financial Group reported a rise of 19.3% in operating profit.
Performance in Detail
Net interest income inched up 1.0% on a year-over-year basis to
£5,496 million ($4,465 million) in the reported period. Net
interest margin increased 20 basis points to 2.17%, driven by
repricing activities across a number of divisions.
Non-interest income came in at £4,482 million ($9,171 million),
down 13.2% year over year. The decline reflected reduction in
income from trading activities, net fees and commissions and other
Operating expenses for the reported period totaled £7,108 million
($11.9 billion), down 8.3% year over year. Adjusted operating
expenses, excluding restructuring and litigation and conduct costs
were down 8% to £6,344 million ($10.6 billion). The decline was
attributed to headcount reductions and prudent control of
discretionary expenditure in Corporate & Institutional Banking
(CIB). Notably, restructuring of the bank's cost base are showing
Moreover, adjusted cost to income ratio improved to 64% from 65%.
Loan impairment losses decreased 87.5% to £271 million ($452
million) from the prior-year period. Notably, asset quality
continued to improve in the UK and Ireland.
As of Jun 30, 2014, RBS exhibited a strong capital position. Funded
assets stood at £736 billion ($1.25 trillion), down slightly from
£746 billion ($1.23 trillion) as of Dec 31, 2013. Total assets were
£1,011 billion ($1.72 trillion), down from £1,028 billion ($1.69
trillion) as of Dec 31, 2013.
Net loans and advances to customers were £387 billion ($659
billion), down from £393 billion ($648 billion) as of Dec 31, 2013.
Loan to deposit ratio was 96% compared with 94% in the prior-year
As of Jun 30, 2014, Common Equity Tier 1(CET) ratio was 10.1%,
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 £392 billion ($667 billion), down
from £429 billion ($707 billion) as of Dec 31, 2013.
Outlook for 2014
With the ongoing economic recovery in the UK, management
anticipates net interest margin to remain close to the first-half
2014 levels. Moreover, income from fixed income products is
anticipated to reduce in the second half of 2014. The decline is
expected to reflect seasonality and the continuation of the bank's
efforts on minimizing balance sheet risk.
RBS targets £1 billion cost reductions in 2014 to be accomplished,
though restructuring costs are expected to be higher in the second
half of 2014. Notably, restructuring charge of about £1.5 billion
is anticipated in 2014, with overall restructuring costs to be
around £5 billion over 2014 to 2017.
Management expects RCR funded assets to be down from £29 billion at
its inception to about £15 to £18 billion at the end of 2014. The
overall costs including impairments, disposal losses and running
expenses for RCR is expected to be £2.5 to £3.0 billion between
2014 and 2016, of which £0.8 billion is anticipated in 2014,
subject to potential volatility.
Further, RBS anticipates credit impairment charges in the second
half of 2014 to remain low, subject to macro economic conditions,
resulting in a charge of about £1 billion for 2014, subject to
We expect RBS' diversified business model and sound financial
position to contribute to its overall growth going forward. Though
increased competition, volatility in the global economy and the new
regulations will remain plausible concerns, ongoing restructuring
will help counter some of the challenges.
Shares of RBS currently carry a Zacks Rank #1 (Strong Buy).
Among other foreign banks, Deutsche Bank AG (
) and UBS AG (
) are scheduled to report second-quarter 2014 results on Jul 29,
while Brazil's Itau Unibanco Holding S.A. (
) will report on Aug 5.
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