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Royal Bank of Scotland Group plc (RBS) Ord GBP1

Sell: 388.80pBuy: 389.00p06.90p (1.81%)
FTSE 1001.23%
Market closedPrices as at close on 19 December 2014Prices delayed by at least 15 minutes | Switch to live prices |
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HL comment (31 October 2014)

Third quarter results: RBS has continued its positive momentum with a strong update, but a number of issues remain unresolved. In particular, the further provisions for PPI and Forex are symptomatic of the "long list of conduct and litigation issues" which will continue to be costly, time-consuming and distracting. In addition, there will also be restructuring costs to be considered (the cost/income ratio spiked sharply in the quarter) which will add to the general regulatory overhang. Along with a dividend payment which is clearly some way off and the government share stake (and therefore influence), the journey back to full recovery is likely to remain arduous.

For this particular quarter, however, there are certainly some bright spots, not least of which is the swing to a pre-tax profit, underpinned by strong improvements to the metrics of earnings per share, return on equity and the capital cushion. The previously trailed improvement to the impairment picture, helped along by a benign economic environment in the UK and Ireland, is also giving RBS some breathing space.

In terms of the share price, these opposing factors have tended to cancel each other out - the shares are unchanged over the last year, as compared to a 5% dip for the wider FTSE100, although some interim weakness has been recovered, with a 22% hike in the last six months. Today’s update certainly records progress, but it may not yet be enough to alter the present current market consensus opinion of the shares as a sell.

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Financial Highlights:
  • RBS reported pre-tax profits of £1.27 billion for the quarter, up £260 million from the previous quarter and compared to a loss of £634 million in the same quarter a year earlier.
  • The bank has set aside £400 million to cover possible foreign exchange market manipulation fines.
  • The bank also set aside a further £100 million to cover the cost of compensation for mis-sold Payment Protection Insurance (PPI).
  • Operating expenses were down 5% in the quarter. RBS confirmed it remains on track to deliver its £1 billion operating cost reduction target for 2014.
  • The Common Equity Tier 1 capital ratio (capital cushion) strengthened from 10.1% in June to 10.8% as at 30 September. 
  • The banks cost/income ratio was 89% compared with 75% in Q2 2014 reflecting higher litigation and conduct costs, along with lower income. 

Negative Points:
  • RBS is one of a number of banks being investigated by regulators over allegations that currency markets were rigged. The bank announced today that it is setting aside £400 million to cover the cost of possible manipulation of the foreign exchange market.
  • Corporate & Institutional Banking unveiled a weak quarter reporting an operating loss of £557 million reflecting litigation and conduct costs of £562 million (that included the £400 million set aside to cover the FX probe).
  • Whilst RBS has settled over the Libor rate-rigging investigation, it still faces a number of claims over the alleged manipulation of the foreign exchange market, the sale of US mortgage-backed securities, and the mis-selling of interest-rate swaps and payment protection insurance.
  • Being part nationalised appears to place the group at a disadvantage to its competitors without government interest - lending and staff pay policies have been influenced. The Chairman previously noted "It is a challenge for all those involved to manage the complexities and occasional tensions in this structure. The ability to run the company on a commercial basis can be hindered by elements of the periodic debate on how to respond to such tensions, in the media and elsewhere."
  • RBS was rescued with £45.5 billion of British taxpayer cash at the height of the 2008 global financial crisis, making it the world's biggest banking bailout. RBS is 81% government owned.
  • The government bought the shares at the height of the financial crisis at just over 500p a share.
  • No dividend is currently being paid.

Positive Points:
  • RBS has continued its positive momentum with a strong update returning to profit and exceeding analyst expectations.
  • RBS confirmed that it would retain control of Ulster Bank. Ulster Bank reported an operating profit of £394 million in the quarter that is compared to a £58 million profit in the previous quarter. "We have a good market position and believe that, with investment, Ulster Bank can deliver attractive shareholder returns in the future," said Chief Executive Ross McEwan.
  • Personal & Business Banking delivered a robust performance with income growth of 3% in the quarter. Operating profit was £881 million, up 66% on the previous quarter.
  • RBS said it remains on track to deliver its targeted £1 billion of cost reductions in 2014.
  • The bank's recovery remains dependent on a sustained economic recovery, particularly in the UK and Ireland, although also for the US and Europe.

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