DBRS: RBS 3Q14 Profits up on Impairment Release

Summary:
• Profit attributable to shareholders of GBP 896 million in 3Q14
• Impairment release of GBP 801 million offset litigation charges of GBP 780 million
• Revenues fell 11% QoQ, exceeding 5% fall in adjusted costs
• Fully loaded CET1 ratio increased to 10.8%
• DBRS rates RBS Group at BBB (high) with a Negative trend for Senior Unsecured Debt & Deposits

DBRS Ratings Limited (DBRS) commented that the 3Q14 results of the Royal Bank of Scotland Group (RBS or the Group) benefitted from impairment releases of GBP 801 million, which helped to offset the GBP 780 million of legacy conduct/ litigation charges. Profit attributable to shareholders was GBP 896 million in 3Q14 (GBP 230 million in 2Q14), compared to a loss of GBP 828 million in 3Q13. The main driver for the improved results was a large impairment release (mostly relating to Ulster and RBS Capital Resolution (RCR)) related to further improvements in credit conditions in Ireland and the UK.

Although RBS made further progress against its restructuring plan, with the sale of 28.75% of Citizens Financial Group, the ongoing restructuring remains challenging with revenues falling faster than costs. Total income was down 11% QoQ, with Corporate & Institutional Banking down 23% QoQ, reflecting a weak performance in Rates and Credit, including the reduction of the US ABS book. Some progress was made in reducing expenses as adjusted expenses (which excludes restructuring charges, conduct and litigation) were down by 5%, but the adjusted cost-income ratio was still up at 67% in 3Q14 from 62% in 2Q14. Conduct and litigation charges were GBP 780 million (largely related to investigations into the forex market and Payment Protection Insurance) and are expected to continue to weigh on the Group’s results.

Capital strengthened as the Group’s end-point Common Equity Tier 1 ratio improved by 70 bps to 10.8%. The leverage ratio was 3.9%, placing the Group in a reasonable position relative to the proposals for UK banks put forward by the Financial Policy Committee. In addition, the Group met the capital requirements for the recent EBA stress test, reporting a 6.7% ratio in the Adverse Scenario under the PRA capital guidelines (and 8.2% under the EBA’s published capital definitions).

DBRS rates the Royal Bank of Scotland Group at BBB (high) with a Negative trend for Senior Unsecured Debt & Deposits.

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