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RBS Q3 Results Disappoint UK; Stake Sale on Hold Till 2016?

Dismal performance in the third quarter of 2015 might lead to postponement of full privatization for The Royal Bank of Scotland Group plcRBS . According to a Bloomberg report, the British government is anticipated to halt its stake sale program until 2016, as the bank's profits plunged steeply in the recently reported quarter.

Royal Bank of Scotland, currently undergoing a massive restructuring overhaul, reported adjusted operating profit, excluding restructuring and litigation and conduct costs, of £842 million ($1.3 billion) for the third quarter. The figure was down 59% year over year reflecting weakness in revenues, partly mitigated by a fall in non-restructuring expenses. In fact, net interest income and non-interest income tumbled more than 8% and 32% year over year, respectively.

Going forward, restructuring charges are projected to increase considerably, particularly in the next three quarters. This, along with a bank levy charge in the fourth quarter of 2015, will likely weigh upon the company's bottom line in the near term. Moreover, significant turnaround in revenue environment remains a distant possibility.

More importantly, Royal Bank of Scotland's management warned investors on Oct 30, stating that charges associated with its past conduct and litigations will likely be "substantially greater" than expectations.

Litigation charges include a potential $13-billion settlement with the U.S. Federal Housing Finance Agency and Department of Justice, related to mortgage-backed securities claims. Additionally, ongoing inspection by Britain's Financial Conduct Authority into activities of the company's Global Restructuring Group turnaround unit might result in another multi-billion penalty for the bank.

Broad-based concerns like these have probably raised concerns over Royal Bank of Scotland's near-term prospects. As a result, the British government is probably contemplating a delay in full privatization of the company.

Additionally, the company's stock has been experiencing weak trading volume on European exchanges, reflecting poor investor interest in the stock. Notably, average volume for September and October was recorded at 20 million shares, against a hefty 78.4 million in August.

British government raised £2.1 billion ($3.3 billion) on its initial sale of 5.4% stake in August, taking its total holding in the company down to 72.9%. However, this came in at a loss of $1.1 billion for the Treasury. In May 2015, Finance Minister George Osborne shelved out plans to sell around £25 billion of RBS shares by 2020. Nonetheless, such plans will likely be put on hold until 2016.

Separately, Osborne is reportedly facing pressure to halt the "fire sale" as campaigners for banking reform, including Move Your Money, want the government to consider alternative options, which include localization of the bank. Notably, a parliamentary debate regarding the same issue is scheduled for today.

Shares of Royal Bank of Scotland, which inched up 0.6% to $9.98 per share with heavy volume on Nov 4, slipped 2.1% to $9.77 in the after-market trading session. However, the stock is up 2.4% since it reported third-quarter earnings on Oct 30.

RBS currently carries a Zacks Rank #3 (Hold).

Better-ranked foreign bank stocks include Banco Macro S.A. BMA and Grupo Financiero Galicia S.A. GGAL , both sporting a Zacks Rank #1 (Strong Buy); while The Bank of Nova Scotia BNS holds a Zacks Rank #2 (Buy).

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ROYAL BK SC-ADR (RBS): Free Stock Analysis Report

BANK OF NOVA SC (BNS): Free Stock Analysis Report

GRUPO GALIC ADR (GGAL): Free Stock Analysis Report

BANCO MACRO-ADR (BMA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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