Royal Bank of Scotland (RBS) Stock Down 3.7% on Q4 Loss

The Royal Bank of Scotland Group plc RBS reported fourth-quarter 2017 loss attributable to its shareholders of £579 million ($768.5 million) as compared with the loss of £4.44 billion ($5.67 billion) witnessed in the prior-year quarter. Following the release, shares of the bank declined 3.78% on the NYSE.

Lower margin and non-interest income were headwinds. However, contraction in adjusted operating expenses displayed prudent expense management.

Operating loss totaled £583 million ($773.8 million), as compared with the loss of £4.1 billion ($5.2 billion) incurred in the year-ago quarter. Adjusted operating profit, excluding certain items, came in at £512 million ($679.6 million), tanking 56.8% on a year-over-year basis.

Furthermore, division wise, Commercial & Private Banking (CPB) segment reported operating profit in the reported quarter, as compared with loss witnessed in the prior-year period. RBS International and Personal & Business Banking (PBB) segments recorded profits in both the reported and the prior-year quarter. Central items and NatWest Markets segments reported loss in both the periods.

For 2017, The Royal Bank of Scotland reported profit attributable to its shareholders of £752 million ($969 million) as compared with the loss of £6.96 billion witnessed in the prior year.

Margin Pressure Persists, Cost Control Effective

Net interest income inched up on a year-over-year basis to £2.21 billion ($2.93 billion) in the fourth quarter, as increase in volumes and re-pricing benefits have been mostly offset by balance-sheet reductions in the NatWest Markets. Net interest margin contracted 15 basis points to 2.04%, displaying elevated liquidity, competitive pressures on margin and mix impacts across the core businesses.

Non-interest income came in at £846 million ($1.12 billion), down 16.1% year over year. The decline primarily reflected lower other non-interest income.

Operating expenses totaled £3.4 billion ($4.5 billion), plunging 54.1% year over year. Adjusted operating expenses, excluding restructuring costs, litigation and conduct costs were down 5% to £2.11 billion ($2.8 billion). Furthermore, adjusted cost to income ratio increased to 73.6% from 66.3% in the prior-year quarter.

Loan impairment losses were £234 million ($310.6 million), as compared with releases of £75 million in the year-earlier quarter.

Strong Capital Position

As of Dec 31, 2017, The Royal Bank of Scotland exhibited a strong capital position. Funded assets came in at £577.2 billion ($778.7 billion), up from £551.7 billion ($678.7 billion) as of Dec 31, 2016. Total assets were £738.1 billion ($995.8 billion), down from £798.7 billion ($982.5 billion) as of Dec 31, 2016.

Net loans and advances to customers were £323.2 billion ($436 billion), up from £323 billion ($397.3 billion) as of Dec 31, 2016. Loan to deposit ratio was 88% compared with 91% as of Dec 31, 2016.

As of Dec 31, 2017, Common Equity Tier 1(CET) ratio was 15.9% compared with 13.4% as of Dec 31, 2016.

Risk-weighted assets came in at £200.9 billion ($271 billion), down 12% year over year.

Outlook

For 2018, a set of targets has been committed by the bank.

Management maintains the CET1 ratio projection at 13%, including certain factors.

By the end of 2018, management expects RWAs to be lower by £5-£10 billion.

Management expects to incur restructuring charges of around £2.5 billion across 2018 to 2019 cumulatively, of which £0.3-billion associates with the completion of the State Aid remedy and reintegration of the former Williams & Glyn (W&G) business into UK PBB.

In the medium term, management retains the target of achieving a sub 50% cost to income ratio and above 12% return on equity by 2020.

Our Viewpoint

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

Royal Bank Scotland PLC (The) Price

Royal Bank Scotland PLC (The) Price | Royal Bank Scotland PLC (The) Quote

RBS currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

UBS Group AG UBS reported fourth-quarter 2017 net profit attributable to shareholders of CHF 955 million ($967.7 million) on an adjusted basis, up around 25.2% from the prior-year quarter. Results exclude deferred tax expense. Including deferred tax expense, net loss attributable to shareholders came in at CHF 2.2 billion ($2.23 billion) compared with net income of $636 million recorded in the prior-year quarter.

Deutsche Bank AG DB reported net loss of €2.2 billion ($2.6 billion) in the fourth quarter compared with net loss of €1.9 billion ($2.3 billion) incurred in the year-ago quarter. The results were affected by non-cash charge of €1.4 billion resulting from a valuation adjustment on its deferred tax assets due to the tax reform.

ICICI Bank Ltd.’s IBN net profit plunged 32% year over year to INR16.50 billion ($258 million). Results were adversely affected by fall in non-interest income and a marginal rise in operating expenses. However, increase in net interest income (reflecting rise in loans) and lower provisions were the tailwinds.

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