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Royal Bank of Scotland (RBS) Falls 4.65% on Q1 Loss

The Royal Bank of Scotland Group plc RBS declined 4.65% on NYSE after it reported first-quarter 2016 loss attributable to shareholders of £968 million ($1.4 billion) as compared with a loss of £459 million in the prior-year quarter. Results included payment of the final Dividend Access Share (DAS) dividend of £1,193 million to the U.K. Government.

Further, reduced net interest and non-interest income was a major drag. However, contraction in adjusted operating expenses reflected prudent expense management.

Operating loss totaled £341 million ($488.4 million) as compared with loss of £469 million in the prior-year quarter. The loss resulted from restructuring charges and litigation and conduct costs along with other costs. Adjusted operating profit, excluding certain items came in at £440 million ($630.2 million), down 67.5% on a year-over-year basis.

Furthermore, division-wise, Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and Williams & Glyn segments reported operating profit in both the reported and prior-year quarter. Corporate & Institutional Banking (CIB) and Central items reported loss in this as well as the year-ago quarter.

RBS Capital Resolution (RCR), created in Jan 2014, reported an operating loss of £301 million ($431.1 million) as compared with a loss of £172 million in the prior-year quarter.

Notably, the divestment process of the Williams & Glyn business was in full swing, but the completion is not expected even by the end of 2017 due to some complexities in the customer and product mix of the business and the aim to form a cloned banking platform. Therefore, management is seeking alternatives for divestment.

Performance in Detail

Net interest income inched down 2.1% on a year-over-year basis to £2.2 billion ($3.2 billion) in the reported quarter, attributed to the winding down of Capital Resolution. Net interest margin remained stable at 2.15%, as the benefit in reductions in the low yielding non-core assets were offset by slight asset margin pressure and mix impacts in the core businesses.

Non-interest income came in at £908 million ($1.3 billion), down 31% year over year. The decline primarily reflected lower income by Capital Resolution due to asset disposal, deterioration in CIB and increased charges from volatile items under IFRS.

Operating expenses totaled £2.4 billion ($3.4 billion), down 33.3% year over year. Adjusted operating expenses, excluding restructuring costs, litigation and conduct costs and write down of goodwill were down 4.3% to £2.2 billion ($3.2 billion). Moreover, adjusted cost to income ratio increased to 76% from 65% in the prior-year quarter.

Loan impairment losses were £223 million ($319.4 million) as compared with releases of £129 million in the prior-year quarter.

Balance Sheet

As of Mar 31, 2016, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £570.7 billion ($821.4 billion), up from £552.9 billion ($819.6 billion) as of Dec 31, 2015. Total assets were £882.9 billion ($1.3 trillion), up from £815.4 billion ($1.2 trillion) as of Dec 31, 2015.

Net loans and advances to customers were £317.1 billion ($456.4 billion), up from £306.3 billion ($454 billion) as of Dec 31, 2015. Loan to deposit ratio was 90% compared with 89% as of Dec 31, 2015.

As of Mar 31, 2016, Common Equity Tier 1(CET) ratio was 14.6%, compared with 15.5% as of Dec 31, 2015.

Risk-weighted assets came in at £249.5 billion ($359.1 billion), up from £242.6 billion ($359.6 billion) as of Dec 31, 2015.

Outlook

For 2016, a set of targets has been maintained by the bank.

Management maintains the CET1 ratio projection at 13%. Based on cost reduction efforts, management is targeting reductions of £800 million in 2016 in adjusted operating expenses. Notably, the charge of about £50 million is expected to be incurred related to the Financial Services Compensation Scheme (FSCS) implemented in second-quarter 2016.

Income at the PBB and CPB segments is expected to be stable in 2016 compared with 2015 as balance  sheet  growth,  mainly in  mortgages  and  core  commercial  lending,  is  offset by low interest rates and the uncertain macroeconomic environment.  Compared to 2015, management anticipates modest income erosion at CIB. However, net growth of 4% is anticipated in PBB and CPB customer loans.

Impairments on core portfolios are expected to remain modest in 2016.

Further, management expects restructuring costs to remain high in 2016, totaling over £1 billion. Capital Resolution is expected to reduce RWAs to around £30 billion by the end of 2016, despite a challenging economic environment for disposals and continued substantial run-off activity.

Management anticipates  Capital  Resolution  disposal  losses  of  about  £1.5  billion  over  the  period  2015-19, and most of the remaining losses is expected in 2016 (2015 - £367 million).

Our Viewpoint

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

Shares of RBS currently carry a Zacks Rank #4 (Sell).

Competitive Landscape

Deutsche Bank AG DB reported net income of €236 million ($260.3 million) in the first quarter of 2016, down 57.8% year over year. Income before income taxes came in at €579 million ($638.6 million), down 60.9% year over year. The quarterly results were impacted by lower revenues and higher provisions. However, the reduction in non-interest expenses was a positive.

Other foreign banks that are expected to release results soon include Mitsubishi UFJ Financial Group, Inc. MTU and UBS Group AG UBS. UBS is scheduled to report on May 6, while Mitsubishi UFJ is slated to report March-end results on May 16.

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