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Royal Bank of Scotland Group plc (RBS) Ord GBP1

Sell:198.30p Buy:198.40p 0 Change: 5.00p (2.59%)
FTSE 100:0.43%
Market closed Prices as at close on 5 December 2016 Prices delayed by at least 15 minutes | Switch to live prices |
Sell:198.30p
Buy:198.40p
Change: 5.00p (2.59%)
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Market closed Prices as at close on 5 December 2016 Prices delayed by at least 15 minutes | Switch to live prices |
Sell:198.30p
Buy:198.40p
Change: 5.00p (2.59%)
Market closed Prices as at close on 5 December 2016 Prices delayed by at least 15 minutes | Switch to live prices |
Deal now Deal for just £11.95 per trade in a ISA, SIPP or Fund & Share Account
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HL comment (28 October 2016)

Progress in the core divisions

RBS shares rose by 1% after the release of its third quarter results. Driven by an improved performance from core divisions, the bank has reported a £255m operating profit for the quarter. However, restructuring costs of £469m, litigation and conduct costs of £425m and a £300m deferred tax asset impairment pushed the group to an attributable loss of £469m.

Our View

It might not look like it on the surface, but RBS' core divisions are putting in an improving performance. RBS has generated over £1 billion of adjusted operating profit across the Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and Corporate & Institutional Banking (CIB) divisions in each quarter this year. Lending in PBB and CPB has been looking better recently too, serving to grow the balance sheet.

Unfortunately, outside of the core, the bad news just keeps on coming at RBS. The investigation into mis-selling of US residential mortgage backed securities (US RMBS) is likely to result in further large fines.

Capital Resolution (CR) continues to haemorrhage money, as expected, and the costs and charges that RBS refer to as 'exceptionals' are likely to continue next year. The only saving grace here is that the wind down continues apace. Disposing CR risk-weighted assets (assets against which the group must hold capital) will free up reserves and improve the CET1 ratio, a core measure of a bank's solvency.

The other monkey on RBS' back in recent times has been Williams & Glyn. W&G must be split out as part of the settlement made with the EU for receiving State Aid when the bank was rescued. It was originally mandated to happen by the end of next year at the latest. Although RBS has had 'positive discussions' with a number of interested parties, and has received an offer from Clydesdale, the bank today confirmed that the sale won't go through until after this deadline. As long the sale of W&G is pushed back, costs will continue to mount.

Beyond the less than exceptional exceptionals, RBS' core business is expected to be broadly stable for the rest of the year. The bank is on track to cut £800m of costs this year, having taken £695m off the cost base so far this year. While record low interest rates will continue to hamper net interest margins (the difference between the price at which it takes in deposits and price it loans out money) it also means bad debts should be low.

Overall though, with litigation costs continuing to hang over the future and uncertainty remaining around W&G, RBS still looks some way from rude health and a dividend is unlikely in the near term.

Third quarter results in detail:

Across the core customer-facing businesses, adjusted operating profit of £1,331m was £212m higher than twelve months ago.

Corporate & Institutional Banking (CIB) reported an operating profit of £90m compared with an operating loss of £109m in Q3 last year. Private and Business Banking (PBB) and Commercial & Private Banking (CPB) net loans and advances have increased by 13% on an annualised basis since the start of 2016. Gross new mortgage lending of £7.9bn was 12% higher than Q3 2015.

Group net interest income of £2.2bn showed no increase on last year. While improvements have been made across the bank's core divisions, the capital resolution 'bad bank' held back performance, with net interest income falling to £27m from £78m.

Impairments in the Capital Resolution (CR) division totalled £120m, up from £67m in the previous quarter, driven by a £190m charge in respect of the shipping portfolio. Risk-weighted assets fell by £3.7bn in the quarter to £38.6bn, as the group makes progress towards its goal of reducing RWAs to £30-35bn by the year end.

In the quarter, group RWAs fell by £10bn, with RWAs in the UK PBB division falling by £5.1bn. This has helped to improve the bank's Common Equity Tier 1 ratio by 0.5 percentage points to 15%, above the 13% target.

The bank's cost-to-income ratio of 88% compares favourably to 103% at this time last year. Group net interest margin in the quarter of 2.17% compares to 2.09% in Q3 last year, but is down from 2.21% in Q2.

Looking forward, RBS concedes that low interest rates presents a range of uncertainties which could impact core performance. This means that the previous cost-to-income and returns targets are no longer likely to be achieved by 2019. For the year as a whole, restructuring charges are set to be around £1.5bn. Capital Resolution disposal losses of around £2bn are now expected, up from the previous guidance of £1.5bn.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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