DBRS: RBS Makes Progress in 2014, but Restructuring Continues

Summary:
• Loss attributable to shareholders of GBP 3.5 billion in 2014, reflecting a GBP 4.0 billion FV writedown related to Citizens, GBP 2.2 billion of litigation and conduct charges, and GBP 1.6 billion DTA writedowns
• Fully loaded CET1 ratio increased to 11.2%
• Further radical restructuring of CIB over next 4 years will lead to additional charges
• DBRS rates RBS Group at BBB (high) with a Negative trend for Senior Unsecured Debt & Deposits

DBRS Ratings Limited (DBRS) commented that the GBP 3.5 billion loss reported by the Royal Bank of Scotland Group (RBS or the Group) in its 2014 results reflected the GBP 4.0 billion Fair Value writedown related to Citizens, GBP 2.2 billion litigation and conduct charges and GBP 1.6 billion DTA writedowns related to the UK and US. Despite this significant loss, the Group made progress in a number of areas in 2014, including reducing underlying costs faster than revenues, significantly reducing the restructuring unit (RCR), and further increasing the Common Equity Tier 1 (CET1) ratio. Nevertheless, the next few years will remain challenging for the Group as it has a number of major initiatives still to complete and has announced a further radical restructuring of Corporate & Institutional Banking (CIB), which it estimates will lead to GBP 2.5 – 3.5 billion of charges over the 4 year restructuring period.

The Group benefited from impairment writebacks of GBP 1.2 billion in 2014, but cautioned that this is unlikely to be repeated in 2015. And the Group’s NPL ratio reduced to 6.8% from 9.4% in 2013. The Ulster Bank divison which incorporates the Group’s operations in Northern Ireland and the Republic of Ireland, and which has been responsible for a large proportion of previous impairments, reported an operating profit of GBP 606 million in 2014 (loss of GBP 1.6 billion in 2013).

The Group continues to focus on reducing costs. In 2014 the Group reduced underlying costs by GBP 1.1 billion and the cost-income ratio improved to, a still high 87%, from 95% in 2013. The underlying cost-income ratio of Personal & Business Banking (PBB) was 55% and Commercial Banking was 51% and DBRS notes that the Group intends to remove a further GBP 800 million running costs in 2015.

The Group also announced the completion of its review into its CIB. This will be radically slimmed down so that it provides core debt and trade services to customers in the UK and Europe with limited operations in US and Asia. RWA in CIB will be cut from GBP 107 billion at end-2014 to GBP 35 - 40 billion by 2019 leading to further restructuring charges of GBP 2.5 – 3.5 billion over the period to 2019.

Other challenges for the Group to complete include the disposal of Williams & Glynn, the deconsolidation of Citizens and completion of RCR rundown by end-2015, dealing with remaining litigation and conduct issues, and the implementation of ringfencing in the UK. RBS intends to run with a fully-loaded CET1 ratio of 13% during the CIB restructuring, which provides support for the ratings during the Group’s protracted restructuring.

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.