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Royal Bank of Scotland Group plc (RBS) Ord GBP1

Sell: 352.10pBuy: 352.20p07.00p (2.03%)
FTSE 1000.68%
Market closedPrices as at close on 20 October 2014Prices delayed by at least 15 minutes | Switch to live prices |
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HL comment (30 September 2014)

Trading update: A brief announcement saw Royal Bank of Scotland Group Plc declare that full-year impairments would be lower than expected, and "significantly outperform" its previous guidance of circa £1 billion total impairments for 2014. The news was well received by the market with the share price rising 4% in opening trade. RBS cited a strong operating performance from its RBS Capital Resolution unit (RCR) and anticipates that RCR will record net impairment provision releases in the region of £0.5 billion, but future overall costs remain subject to potential future volatility. The bank noted that revenues at its Corporate & Institutional Banking unit had been weaker than anticipated in the third quarter. Elsewhere, rising Irish residential property prices combined with pro-active debt management had resulted in lower arrears in Ulster (excluding RCR). The bank is expected to release its Q3 2014 interim management statement on 31 October. For now, market consensus opinion points to a sell.

Interim results 1 August:
RBS, who gave a flavour of its results early as they were significantly stronger than the market was expecting, confirmed their announcement and results, publishing its interim results today. Operating profit more than doubled compared to the same period the previous year, overall costs were down by 8%, whilst the impairment figure improved by nearly £2 billion. The tailwinds provided by improving economic conditions in both the UK and Ireland were largely responsible, whilst elsewhere within the numbers the group reported that all customer-facing businesses had improved operating profits. Net margins also improved and further non-core and regulatory disposals made, with the overall result that provisions and restructuring costs could be more comfortably absorbed. Of course, challenges still remain and this announcement does not represent the end game in the RBS turnaround. General regulatory overhang continues to plague the sector, whilst for RBS the lack of a dividend and significant overhang in the form of the government stake will be restrictive for further progress. "These results show that underneath all the noise and huge restructuring of recent years, RBS is a fundamentally stronger bank that can deliver good results for customers and shareholders," Ross McEwan, Chief Executive said in a statement. Based on the combined estimates of analysts that cover the company, market consensus opinion currently points to a weak hold.

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Financial Highlights:
  • RBS reported pre-tax profits of £2.65 billion in the first half of the year, up from £1.3 billion a year earlier.
  • RBS said it remains on track to deliver its target of £1 billion cost reductions in 2014.
  • RBS said impairment losses fell from £2.1 billion to £269 million, a reflection of the ongoing recovery in the UK and Irish economies.
  • The bank set aside £150 million for Payment Protection Insurance (PPI) mis-selling claims and £100 million for other mis-selling claims.
  • Re-structuring costs were £385 million for the quarter and £514 million for the half year.
  • The Common Equity Tier 1 capital ratio (capital cushion) strengthened to 10.1% from 8.6% at the end of 2013.

Negative Points:
  • Ross McEwan added: "But let me sound a note of caution. We are actively managing down a slate of significant legacy issues. This includes significant conduct and litigation issues that will likely hit our profits going forward. I am pleased we have had two good quarters, but no one should get ahead of themselves here - there are bumps in the road ahead of us."
  • In the quarter ended 30 June, the bank set aside an additional £150 million to cover PPI mis-selling taking the overall to date to £3.25 billion.
  • 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 reported a pre-tax operating loss of £8.2 billion in 2013.
  • 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:
  • Royal Bank of Scotland's half year results were unexpectedly strong and represent a significant milestone in the group's return to financial health.
  • Chief Executive Ross McEwan commented: "There is progress on all of our key priorities - capital is stronger, costs are lower and customer activity is gradually improving - although we have only just started with our programme to make it easier for customers to do more business with us."
  • Impairment losses declined by £1.8 billion to £269 million with all core businesses showing significant reductions in impairment losses.
  • The pre-tax profits included a gain of £191 million following the sale of the remaining interest in Direct Line Insurance Group in Q1 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.
  • 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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