RBS First-Half Profit Doubles, Sees 2014 Cost Cuts on Track
Royal Bank of Scotland Group Plc (RBS) said first-half profit almost doubled as impairment charges fell and forecast it will meet a cost-cutting target of 1 billion pounds ($1.7 billion) in 2014. The shares surged the most in more than four years.
Britain’s largest state-owned lender said it expects pretax profit of 2.65 billion pounds, up from 1.37 billion pounds a year earlier, according to a statement today. The earnings mark RBS’s second consecutive profitable quarter. Operating profit is seen jumping to 2.6 billion pounds from 708 million pounds, according to the results released a week early.
Chief Executive Officer Ross McEwan, 57, who took over from Stephen Hester in October, has set up an internal bad bank, combining divisions and scaling back the investment bank as he strives to shore up earnings after last year reporting the biggest annual loss since 2008. Strengthening economic growth in the U.K. and Ireland boosted the value of its assets and helped reduce impairment costs.
“These are strong results, which should lead to consensus upgrades for 2014-2015, but limited upgrades beyond this point, as the beat is mainly due to loan loss reversals which is not sustainable,” Citigroup Inc. analysts led by Andrew Coombs, who have a sell recommendation on the stock, said in a note to clients today. “We therefore view today’s share price reaction as overdone.”
The stock jumped 11 percent to 364.2 pence in London trading, its biggest gain since May 2010. RBS has climbed 7.7 percent this year, the only bank to gain in the period among Britain’s five-biggest lenders.
The government owns 80 percent of RBS and the stock is still below the 407 pence at which taxpayers would break even. The value of the stake increased by more than 3 billion pounds today, according to data compiled by Bloomberg.
“We are actively managing down a slate of significant legacy issues,” McEwan said. “These include significant conduct and litigation issues that will hurt our profits in the months and years to come. There are bumps in the road ahead.”
McEwan, who was previously head of the bank’s retail division, said it would be “very optimistic” to expect RBS to pay a dividend anytime soon.
Impairment losses slumped 1.88 billion pounds in the first-half to 269 million pounds, RBS said. Its bad bank, called RBS Capital Resolution, reported lower provisions following the sale of assets at more favorable prices.
The bank made additional provisions of 150 million pounds for improperly sold loan insurance and 100 million pounds for interest-rate swaps. The bank has five to six months’ cover on payment protection insurance, McEwan said.
The bank’s corporate and institutional unit, which houses most of its investment-banking activities, posted an operating profit of 308 million pounds in the first half compared with a loss of 197 million pounds in the year-earlier period, according to the statement.
“These are good results. We think they came out early because in a sense they’re the opposite of a profit warning,” Eva Olsson, a credit analyst at Mitsubishi UFJ Securities in London, said in a note today. “They knew they would have a market impact and wanted to be sure they didn’t leak.”
RBS may be part of a group settlement that banks are negotiating relating to a currency-rigging probe by the Financial Conduct Authority, the U.K.’s market regulator, people familiar with the situation said this week. The impact of the foreign-exchange scandal is “feeling more like a libor-type activity,” McEwan said, referring to probes into the manipulation of the London interbank offered rate and other benchmarks.
The FCA is trying to fast-track the process and may levy any fines in the coming months, the people said. The group may also include Britain’s Barclays Plc (BARC) and HSBC Holdings Plc.
At RBS, restructuring costs are seen at about 5 billion pounds from 2014 to 2017, with a 1.5 billion-pound charge this year, according to the statement. The bank’s headcount dropped by 8,000 over the past year, it said.
“This was an extremely good set of results,” said Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London, who rates RBS shares outperform. Barua had expected restructuring costs to be about a third higher at 2 billion pounds, according to a report. Impairments this year are unlikely to be more than 1 billion pounds, below his estimate of 1.5 billion pounds, he said.
Net interest margin, the difference between its income from lending and its cost of funding, widened by 20 basis points to 2.17 percent from a year ago. The bank’s common equity Tier 1 capital ratio, a measure of financial strength, rose to 10.1 percent from 8.6 percent at the end of last year.
“The news on capital is good,” Mitsubishi’s Olsson said. The results “make it easier for shareholders to see that they will meet their targets for capital.”
RBS is scheduled to sell shares in its Citizens U.S. consumer bank in an initial public offering this year to help bolster capital. The unit had an operating profit of 421 million pounds in the first half, up from 353 million pounds a year earlier, with impairment losses doubling to 104 million pounds.
McEwan said he should be able to return RBS’s Ulster Bank Ltd. Irish unit to profitability and that the management were “buoyed by a very good economy.” Irish bad bank asset sales have generated a higher-than-expected 150 million-pound gain to date, he said.
The British economy expanded 0.8 percent in the second quarter, pushing output above its previous peak in the first three months of 2008, before the financial crisis hit, the Office for National Statistics said today. The International Monetary Fund yesterday raised its U.K. growth forecast for this year.
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