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Royal Bank of Scotland Posts Strong Q3 Earnings, Costs Dip

The Royal Bank of Scotland Group plcRBS reported third-quarter 2015 earnings attributable to shareholders of £952 million ($1.5 billion), up 6.3% year over year. Results were driven by lower expenses. However, reduced net interest as well non-interest income was on the downside.

Operating loss was £134 million ($207.7 million) as compared with profit of £1.1 billion ($1.8 billion) in the prior-year quarter. The loss resulted from high restructuring charges. Adjusted operating profit, excluding restructuring and litigation and conduct costs came in at £842 million ($1.3 billion), down 59% on a year-over-year basis.

Furthermore, division-wise, Personal & Business Banking (PBB) and Commercial & Private Banking (CPB) segments reported operating profit in both the reported and prior-year period. Corporate & Institutional Banking (CIB) and Central items reported loss in this as well as the year-ago quarter.

RBS Capital Resolution (RCR), created in January 2014, reported operating loss of £16 million ($24.8 million) as compared with profit of £638 million ($1.1 billion) in the prior-year quarter.

Notably, in December 2014, Citizens was classified as a disposal group and was declared discontinued operation. Therefore, on Aug 3, 2015, as RBS's stake in Citizens fell to 20.9%, it is no longer a reportable segment and the results for all periods have been adjusted accordingly.

Performance in Detail

Net interest income inched down 8.3% on a year-over-year basis to £2.2 billion ($3.4 billion) in the reported period, attributed to a decline in average interest-earnings assets, partially offset by volume growth in some segments. Net interest margin decreased 8 basis points to 2.09%, impacted by exclusion of Citizens.

Non-interest income came in at £860 million ($1.3 billion), down 32.4% year over year. The decline primarily reflected reduction in income from trading activities and disposal gains in RCR. Moreover, the fall reflected reduction in CIB's scale.

Operating expenses totaled £3.3 billion ($5.1 billion), down 2.9% year over year. Adjusted operating expenses, excluding restructuring and litigation and conduct costs were down 4.2% to £2.3 billion ($3.6 billion). The decline was attributed to lower administrative expenses. Moreover, adjusted cost to income ratio increased to 75% from 67% in the prior-year period.

Loan impairment releases were £79 million ($122.4 million), down 90.7% year over year.

Balance Sheet

As of Sep 30, 2015, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £580.4 billion ($880.1 billion), down from £697.2 billion ($1.08 trillion) as of Dec 31, 2014. Total assets were £876.4 billion ($1.3 trillion), down from £1,051 billion ($1.63 trillion) as of Dec 31, 2014.

Net loans and advances to customers were £311.4 billion ($472.2 billion), down from £334.3 billion ($519.2 billion) as of Dec 31, 2014. Loan to deposit ratio was 89% compared with 95% as of Dec 31, 2014.

As of Sep 30, 2015, Common Equity Tier 1(CET) ratio was 12.7%, compared with 11.2% as of Dec 31, 2014.

Risk-weighted assets came in at £316 billion ($479.2 billion), down from £355.9 billion ($552.8 billion) as of Dec 31, 2014.

Outlook

Management expects the credit environment to remain relatively stable with modest impairment charges. Asset margins are expected to be under pressure. Further, non-interest income from fee-related products is anticipated to remain low due to modest volume growth and regulatory impacts from the change in interchange fees in the cards business.

In the fourth quarter of 2015, management expects restructuring costs to remain elevated due to high losses on core bank transformation and disposals. Litigation costs and provisions for the same are expected to remain elevated.

The restructuring of CIB is expected to speed up, which would result in reduced revenues due to elevated disposal losses and higher restructuring costs.

Based on cost reduction efforts, management is targeting reductions of £800 million in 2015 in operating expenses.

Management anticipates RWAs to be less than £300 billion by 2015-end, attributed to RCR exit, £2 billion additional Tier 1 Securities (AT1) issuance and the de-consolidation of Citizens.

Our Viewpoint

We expect RBS' diversified business model and the sound financial position to contribute to its overall growth, going forward. Though increased competition, volatility in the global economy and new regulations will remain the plausible concerns, ongoing restructuring will help counter some of the challenges.

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

Competitive Landscape

Including certain one-time expenses, Deutsche Bank AG DB reported net loss of €6 billion ($6.7 billion) in the third quarter of 2015, as compared with €92 million ($122 million) in the prior-year quarter. The bank reported loss before income taxes of €6.1 billion ($6.8 billion), as compared with income of €266 million ($352.9 million) in the prior-year quarter.

Other foreign banks that are expected to release results in the coming days include UBS Group AG UBS and Mitsubishi UFJ Financial Group, Inc. MTU . Mitsubishi UFJ is scheduled to report September quarter-end results on Nov 13, while UBS will report on Nov 3.

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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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