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Royal Bank of Scotland (RBS) Q1 Earnings: What's in Store?

The Royal Bank of Scotland Group plc (RBS is scheduled to report first-quarter 2016 results on Friday, Apr 29.

Last quarter, the company reported a loss attributable to shareholders of £2.7 billion ($4.1 billion) as compared with a loss of £5.8 billion ($9.2 billion) in the prior-year quarter. Results were mainly hit by higher litigation and conduct costs.

RBS, which was bailed out with £45 billion by the British government in 2008, has been striving for growth with several restructuring initiatives that include cost reduction measures, focus on markets where it has a strong presence as well as long-term growth prospects, and improvement in its capital ratios.

Will RBS disappoint this earnings season as well? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Results

The year was off to a bad start for the banks as they faced a tough environment with a number of issues including concerns over the Chinese economic slowdown and continued volatility in commodity prices. Following the broader trend of slump in trading revenues, RBS is likely to witness a decline as well.

Also, the company has experienced decline in net fees and commissions in the recent quarters, and we do not expect this quarter to show substantial strength. Further, profitability of the bank should suffer amid negative interest rates.

As the bank remains focused on expediting its ongoing overhaul, the quarterly results will be affected by further significant restructuring charges. Also, given RBS’ exposure in numerous lawsuits and investigations, the company might have kept additional reserves for litigation expenses, which could dampen the bottom line to some extent.

On a positive note, the company might have benefited from the ongoing economic recovery (albeit at a slow pace) in U.K. and Ireland – the major domestic markets. Growth in core U.K. loan business, particularly in the mortgage space, could act as a positive, which should improve the company’s interest income. Further, as RBS continues to deploy more capital in the businesses in these markets, the quarterly results might get support to some extent.

Also, as the company remains focused on expense management, adjusted operating expenses excluding restructuring costs, litigation and conduct costs should remain stable.

Capital efficiency is the key to survival, and most foreign banks are adopting reconstruction-by-asset-sale strategies to strengthen capital ratios. While this will make their business safer, growth prospects remain unimpressive with decreasing sources of income. Notably, the Edinburgh-based banking giant is likely to exhibit further reduction in risk weighted assets in the upcoming release.

RBS currently carries a Zacks Rank #5 (Strong Sell).

Other foreign banks that are expected to release results in the coming days include Deutsche Bank AG DB, UBS Group AG UBS and Mitsubishi UFJ Financial Group, Inc. MTU. Deutsche Bank and UBS Group are scheduled to report quarterly results on Apr 28 and Apr 29, respectively. Mitsubishi UFJ will report full year results on May 16.

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UBS GROUP AG (UBS): Free Stock Analysis Report
 
DEUTSCHE BK AG (DB): Free Stock Analysis Report
 
ROYAL BK SC-ADR (RBS): Free Stock Analysis Report
 
MITSUBISHI-UFJ (MTU): Free Stock Analysis Report
 
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