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Royal Bank of Scotland Group plc (RBS) Ord GBP1

Sell: 303.20pBuy: 303.50p2.70p (0.89%)
FTSE 1000.62%
Market closed. Prices as at close on 17 April 2014.
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HL comment (27 February 2014)

Full year results: The numbers make for grim reading as RBS continues to wrestle with the legacy of its troubled past. Many of the bank's targets are some years away, and in the meantime the overall loss is greater than had been expected, even after RBS had taken some of the sting out of the news with its pre-release announcement in late January. Group income fell 10%, the cost base is high, leading to a cost income ratio of 73%, and the planned divestments of Citizens and Williams & Glyn will provide further distractions. Meanwhile, the lack of a dividend payment and the sheer complexity of a restructure which will result in further elevated costs for the next two years are not positive for the investment case. There are some glimmers of light within the statement, such as a reasonable capital cushion, improving credit quality, an operating profit and a simplification of the group which should benefit the bank in due course. Perhaps not surprisingly, the shares have made pedestrian progress, having risen 4% over the last year, as compared to an 8% hike in the wider FTSE100. The word "trust" makes several appearances in the accompanying comments and the bank is well aware that there is a great deal of rebuilding to be done. However, this process will take much time and patience. Unfortunately, this patience is in short supply - the market consensus opinion currently remains entrenched as a sell.

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Financial Highlights:
  • RBS reported a pre-tax operating loss of £8.2 billion for 2013.
  • The bank is now focusing on a cost-to-income target of 55% by 2017, down from around 73% currently.
  • In January the bank 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.
  • Additional provisions totaling nearly £3.0 billion have been detailed. Costs to readdress the possible mis-selling of US mortgage products, PPI and Interest Rate Hedging Products have been outlined.
  • Management had already detailed £4.0 to £4.5 billion of costs to be taken in order to cover losses on assets in a so called "bad bank".
  • A Core Tier 1 ratio (capital cushion) of 10.9% at 31 December 2013 was reported.

Negative Points:
  • 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.
  • 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:
  • The bank outlined a strategic plan broadly based around cutting costs and refocusing the franchise on its UK activities. The group's seven existing operating divisions are to be realigned into three businesses - personal and business banking, commercial and private banking, and corporate and institutional banking in a bid to refocus on the UK.
  • 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%.
  • RBS announced plans to sell its remaining stake in Direct Line, which could realise more than £1 billion. Under European Union competition rules, imposed after the £45.5 billion bailout of RBS, it must sell its entire holding by the end of this year. The bank sold 20% of its holding in the insurer in September, generating £630 million.
  • Management previously announced a review into how it serves its customers. The strategic review is aimed at driving cost reductions and improving efficiencies from its core businesses during 2014 but will take two to three years to embed.
  • The bank plans to float Citizens Bank in the US and Williams & Glyn, the UK retail business.
  • 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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