DBRS: RBS 1H14 Prelim. Results up on Lower Impairments; Risks Remain

Summary:
• Profit attributable to shareholders was GBP 1.4 billion in 1H14, supported by lower impairments and progress on asset disposals
• Fully loaded CET1 ratio increased to 10.1%
• Potential litigation/conduct charges and restructuring execution risks remain
• DBRS rates RBS at A (low) with a Negative trend for Senior Unsecured Debt & Deposits

DBRS Ratings Limited (DBRS) commented that the preliminary 1H14 results of the Royal Bank of Scotland Group (RBS or the Group) reflect the progress being made on its most recent restructuring programme announced in February 2014. However, ongoing restructuring execution risks and legacy conduct/ litigation charges remain a significant uncertainty for the Group’s future performance.

RBS released its preliminary results on 25 July ahead of the final interim results to be published on 1 August. Profit attributable to shareholders is expected to be GBP 1.4 billion in 1H14 (GBP 230 million in 2Q14), compared to GBP 535 million in 1H13. Although the results included some positive one-off items (including gains from the sale of the remaining interest in Direct Line Insurance Group and the Illinois branch network of Citizens Financial Group), the main driver for the improved results was a significant drop in impairments and positive results from the run-down of RBS Capital Resolution (RCR).

Impairment charges were GBP 269 million in 1H14 (including a write back of GBP 93 million in 2Q14), compared to GBP 2.15 billion in 1H13. Further detail will be published in the final results next week, but a relative improvement in credit conditions in Ireland and the UK was a key factor. In addition, funded assets in RCR were reduced by GBP 8 billion, with an RWA equivalent reduction of GBP 21 billion in 1H14 (a decrease of 33%). This contributed to an increase in the fully loaded Basel III Common Equity Tier 1 to 10.1% (up from 8.6% at end 2013).

Total income was down 6%, reflecting the adjustment to a smaller balance sheet, with Corporate & Institutional Banking down 10%, and DBRS expects the restructuring of this division to continue to negatively impact results. Nevertheless, total expenses were also down 8%, leading to an improvement in the reported cost-income ratio to 71% in 1H14. DBRS notes that the Group’s core customer businesses appear to be resilient, with the net interest margin of the Group up 20 basis points year-on-year at 2.17% in 1H14, and the new mortgage lending market share of 9.9%. Conduct charges for Payment Protection Insurance (PPI) and Interest Rating Hedging were lower in 1H14 at GBP 250 million (GBP 620 million in 1H13), but litigation/ investigations are still underway in relation to Foreign Exchange and the US Federal Housing Finance Agency.

DBRS rates RBS at A (low) with a Negative trend for Senior Unsecured Debt & Deposits. The preliminary results reduce some of the downward pressure on the rating, which is sensitive to a failure to build capital ratios or to deterioration in the franchise of the Group’s core businesses. However, it is still too early to see a reversal of the Negative trend, which would require further progress in risk reductions and successful implementation of the cost reduction programme.

Note:
All figures are in British Pounds (GBP) unless otherwise noted.