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Royal Bank of Scotland Group plc (RBS) Ord GBP1

Sell: 322.50pBuy: 322.60p03.30p (1.03%)
FTSE 1000.99%
Market closedPrices as at close on 22 July 2014Prices delayed by at least 15 minutes |  Switch to live prices |
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HL comment (2 May 2014)

First quarter results: It seems that these numbers represent the calm before the storm. The initial share price reaction seems tinged with some relief. The quarterly performance itself is respectable - a significant reduction in impairments, costs down, an improvement in underlying profit and a relatively robust capital cushion. Much further out, the streamlining of the bank and a following wind may enable the resumption of a dividend and the removal of the stultifying government stake. However, in the meantime the bank is still in the midst of dealing with its legacy issues, and has warned that there will be a considerable rise in costs as the year progresses, driven both by the restructure and the possibility of further regulatory fines. RBS is pursuing a similar route to Lloyds in preparing to simplify and focus its operations, but Lloyds is much further down the road. Prior to this update, the share price was unchanged over the last year, during which time the wider FTSE100 added 5%. The competition continues to move on whilst RBS deals with its past and, with rather more attractive opportunities elsewhere in the sector, market consensus opinion currently remains firmly rooted to a sell.

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Financial Highlights:
  • RBS reported a pre-tax profit of £1.64 billion, up from £826 million in the corresponding quarter in 2013.
  • Impairments were down £671 million from Q1 2013.
  • No significant additional provisions for "conduct-related" matters were registered during the quarter.
  • The bank's cost control continues to improve. It reported a cost-to-income ratio of 66%, down from 73% a year earlier. The bank is aiming to reduce the ratio to 55% by 2017 and 50% in 2020.
  • A Core Tier 1 ratio (capital cushion) of 9.4% at 31 March 2013 was reported (Dec 2013 - 10.9%).

Negative Points:
  • In January, RBS warned that it was setting aside an extra £1.9 billion to cover various claims and conduct related matters in relation to possible mis-selling of US home loans.
  • 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 is co-operating with regulators following a global probe by regulators investigating suspected manipulation of the currency market. UBS, Barclays and Deutsche Bank also previously confirmed their assistance in relation to the investigation.
  • The bank's recovery remains dependent on a sustained economic recovery, particularly in the UK and Ireland, although also for the USA and Europe.
  • 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.
  • RBS reported a pre-tax operating loss of £8.2 billion in 2013.
  • 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 said it has made good progress towards developing detailed implementation plans for its new structure, built around three businesses: Personal & Business Banking, Commercial & Private Banking, and Corporate & Institutional Banking in a bid to refocus on the UK. It will be reporting on this basis from Q2 2014 onwards.
  • In February, RBS completed the sale of its remaining interest in Direct Line Insurance Group raising gross proceeds of £1.11 billion.
  • The bank remains on track to deliver its target of £1 billion in cost reductions in 2014. The group's intention is to cut around £5 billion in costs over the coming four years. The lender also wants to generate 80% of its revenues in the UK by 2018, compared with the current 60%.
  • Ulster Bank reported its first quarterly operating profit since 2009, with significant improvements in impairments, down 80%.
  • The bank plans to float Citizens Bank in the US and Williams & Glyn, the UK retail business "continue to make progress".
  • No significant additional provisions for "conduct-related" matters were registered during the quarter.
  • In August 2013, RBS announced that Ross McEwan, the former head of the bank's retail arm, is to become Chief Executive as of early October 2013. He is tasked with completing the bank's restructuring programme.

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