U.S. markets closed

Royal Bank of Scotland (RBS) Q1 Earnings Fall Y/Y, Costs Down

Zacks Equity Research

The Royal Bank of Scotland Group plc RBS reported first-quarter 2020 profit attributable to its shareholders of £288 million ($368.6 million), significantly down from £707 million in the prior-year quarter. Operating income totaled £519 million ($664.3 million) as compared with £1.01 billion reported in the year-ago quarter.

First-quarter results were impacted by decline in interest income due to the contraction of margins. Also, substantial rise in impairment losses on account of coronavirus-induced uncertainty was a major headwind. However, the company displayed prudent expense management. Further, non-interest income escalated.

Furthermore, division wise, the NatWest Markets segment reported operating profit in the first quarter against a loss witnessed in the prior-year period. Profits at UK Personal Banking, Private Banking and RBS International segments declined year over year. However, Ulster Bank RoI and Commercial Banking units recorded a loss in the reported quarter against profit in the prior-year quarter.

Interest Income Declines, Cost Control Effective

Net interest income dipped 4.5% on a year-over-year basis to £1.94 billion ($2.48 billion) in the first quarter. Net interest margin contracted 18 basis points to 1.89%, displaying impacts from the contraction of the yield curve.

Non-interest income was £1.22 billion ($1.56 billion), up 21.5% year over year.

Operating expenses totaled £1.84 billion ($2.36 billion), declining 5% year over year. Adjusted operating expenses, excluding strategic costs, litigation and conduct costs, moved down 4.7% to £1.81 billion ($2.32 billion). Furthermore, cost-to-income ratio decreased to 57.7% from 63.4% in the prior-year quarter.

Loan impairment rate was 90 basis points (bps) as compared with 11 bps in the year-earlier quarter.

Strong Capital Position

As of Mar 31, 2020, The Royal Bank of Scotland exhibited a strong capital position. Funded assets were £608.9 billion ($825.1 billion), up from £573 billion as of Dec 31, 2019. Total assets were £817.6 billion ($1.04 trillion), up 13.1% from £723 billion reported in the previous quarter.

Net loans to customers were £351.3 billion ($779.4 billion), up from £326.9 billion as of Dec 31, 2019. Loan to deposit ratio was 91% compared with 86% as of Mar 31, 2019.

As of Mar 31, 2020, Common Equity Tier 1 ratio was 16.6%, up 3 bps from Mar 31, 2019. Also, Total Capital ratio improved 3 bps to 21.4%.

Risk-weighted assets came in at £185.2 billion ($237 billion), up 3.3% sequentially.

Outlook

The company maintains its £250 million cost-reduction target. It seeks to offset challenges present in the current environment by the rebalancing of the investment pool and other cost-saving initiatives. It expects strategic costs to be at the lower end of the previously mentioned £0.8-1.0 billion for the year.

Management expects regulatory changes to adversely impact income in personal business by around £200 million.

Full-year 2020 loss rate is expected to be meaningfully higher than the previously provided range of below 30-40 bps.

Management expects lending growth of more than 3% across retail and commercial businesses, given the significant increase in lending, so far this year.

Our Viewpoint

We expect Royal Bank of Scotland’s diversified business model and sound financial position to be conducive to overall growth in the near term. However, heightened competition, volatility in the global economy and litigation costs remain plausible concerns.

Royal Bank Scotland PLC (The) Price and Consensus

 

Royal Bank Scotland PLC (The) Price and Consensus

Royal Bank Scotland PLC (The) price-consensus-chart | Royal Bank Scotland PLC (The) Quote

The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Deutsche Bank DB reported first-quarter 2020 net income of €66 million ($72.8 million) compared with the year-ago quarter’s €201 million. Also, the German lender reported adjusted profit before taxes of €303 million ($334.3 million), up 13% year over year.

Barclays’ BCS first-quarter 2020 net income attributable to ordinary equity holders of £605 million ($774.6 million) represents a decline of 41.7% from the prior-year quarter’s reported number.

HSBC Holdings’ HSBC first-quarter 2020 pre-tax profit of $3.2 billion represents a decline of 48% from the prior-year quarter’s reported number. The reduction primarily reflects the adverse impacts of the coronavirus outbreak and weakening oil prices.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Royal Bank Scotland PLC (The) (RBS) : Free Stock Analysis Report
 
Barclays PLC (BCS) : Free Stock Analysis Report
 
Deutsche Bank Aktiengesellschaft (DB) : Free Stock Analysis Report
 
HSBC Holdings plc (HSBC) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research