RBS Shares Crumble on Q4 Loss

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The Royal Bank of Scotland Group plc’s (RBS) share price plunged 6.22% to $11.00, following the reported loss in fourth-quarter 2013. Fourth-quarter 2013 loss from continuing operations came in at £8.61 billion ($13.93 billion), as compared with the loss of £2.27 billion ($3.64 billion) in the prior-year quarter.

Results were negatively impacted by higher loan impairment losses, regulatory charges and write-down of goodwill. Notably, impairment losses related to the formation of RBS Capital Resolution (:RCR) amounted to £4,290 million ($6,943 million) in the quarter.

Additionally, the results reflected lower net interest income and non-interest income. Moreover, escalated operating expenses depict undisciplined expense management.

Core operating loss came in at £523 million ($846 million) compared with income of £1,382 million ($2,219 million) in the prior-year quarter. The decline was attributed to the higher impairment losses related to the formation of RCR and related strategy. Moreover, non-core operating loss came in at £3.9 billion ($6.3 billion) compared with the loss of £942 million ($1,513 million) in the prior-year quarter.

Furthermore, division-wise, in the final quarter, Retail & Commercial and Central items division reported operating loss of £388 million ($628 million) and £174 million ($282 million), respectively, while Markets Division reported an operating profit of £39 million ($63 million).

For 2013, loss from continuing operations was reported at £8.63 billion ($13.5 billion) compared with the loss of £5.72 billion ($9.06 billion) in the prior year.

Performance in Detail

Net interest income dipped slightly on a year-over-year basis to £2,767 million ($4,478 million) in the final quarter. Non-interest income came in at £1,173 million ($1,898 million), down 43.2% year over year. The decline reflected reduced central treasury hedge income and valuation adjustments in Non-Core.

Operating expenses for the quarter totaled £3,247 million ($5,255 million), up 10.1% over the prior-year quarter, mainly due to higher staff expenses. Moreover, core cost to income ratio deteriorated to 69% from 56% in the prior-year quarter, while Group cost to income ratio deteriorated to 82% from 61%.

Loan impairment losses more than doubled to £5,131 million ($8,304 million) from £1,402 million ($2,269 million) in the prior-year quarter. This was primarily led by an increase in loan impairments both in the core and non-core portfolios.

Balance Sheet

As of Dec 31, 2013, RBS exhibited a strong capital position.  Funded assets stood at £740 billion ($1,220 billion), down 14.9% year over year. Total assets were £1,028 billion ($1,695 billion), down 21.6% year over year.

Loans and advances to customers were £393 billion ($648 billion), down 9% year over year. Loan to deposit ratio was 94% compared with 100% in the prior-year quarter.
 
Capital ratios

As of Dec 31, 2013, core Tier 1 ratio was 10.9%, compared with 10.3% as of Dec 31, 2012. Risk-weighted assets came in at £385 billion ($635 billion), down 16.3% year over year. Tier 1 leverage ratio stood at 14.4x compared with 15.0x as of Dec 31, 2012.

On a fully applied Basel III basis, the Common Equity Tier (CET) 1 ratio was 8.6%, up 90 basis points year over year. RBS continues to target a fully loaded Basel III CET1 ratio of 11% by the end of 2015 and 12% or above by the end of 2016.

Outlook for 2014

Though economic recovery in the UK is visible, management anticipates the performance from core businesses to grow at a slower pace due to persistent low interest rates and deleveraging in commercial real estate and shipping along with excess liquidity.

Margins are expected to be slightly up and strategic initiatives to result in cost reductions and improve efficiency in 2014. Though full implementation of these actions will take two to three years, management anticipates the underlying cost base to be lower by £1 billion in 2014.

Sale of Interest in Direct Line Group (:DLG)

Recently, RBS announced the completion of the residual interest in DLG. Notably, this sale excludes 4.2 million shares vested by RBS to Direct Line Group management as long term incentive plan awards.

On completion of the transaction, RBS will be able to fulfill the disposal as per the specifications of the European Commission. Previously, during 2013, RBS vended two tranches of its remaining shares in the Direct Line Insurance Group and realized £1,137 million as gross proceeds. As of Dec 31, 2013, RBS held 28.5% of DLG’s issued share capital.

Performance of Other Foreign Banks

Impacted by huge litigation costs, Deutsche Bank AG (DB) reported net loss of €965 million ($1.3 billion) in the fourth quarter of 2013 as compared with a loss of €2.5 billion ($3.4 million) in the prior-year quarter. Results included Credit Valuation Adjustment (CVA), Debt Valuation Adjustment (DVA) and Funding Valuation Adjustment (:FVA) charges of €623 million ($847.8 million), cost-to-achieve of €509 million ($692.7 million) and litigation charges of €528 million ($718.6 million).

UBS AG (UBS) reported fourth-quarter 2013 net income attributable to shareholders of CHF 917 million ($1.0 billion), which compared favorably with the prior-year quarter loss of CHF 1.9 billion ($2.0 billion). The company experienced higher net interest and trading revenues (up 16% year over year) and elevated net fee and commission income (up 3%). Moreover, decreased operating expenses acted as a tailwind for the quarter.

Brazil’s Itau Unibanco Holding S.A. (ITUB) reported fourth-quarter 2013 recurring earnings of R$4.7 billion ($2.1 billion), up 34.3% year over year. Including non-recurring items, net income came in at R$4.6 billion ($2.0 billion), up 31.4% year over year. The year-over-year increase was primarily attributed to reduced expenses for provision of loan and lease losses and increased managerial financial margin along with higher banking service fees and income from banking charges.

Our Viewpoint

We expect RBS’ diversified business model and sound financial position to contribute to its overall growth going forward. Though ongoing restructuring will help counter some of the challenges, increased competition, volatility in the global economy and the new regulations will remain plausible concerns.

Shares of RBS currently carry a Zacks Rank #2 (Buy).

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