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RBS 3Q12 - Underlying earnings absorbed by one-off items

by Elizabeth Moran | Nov 07, 2012

Similar to other British banks, RBS demonstrated another quarter of underlying success, but reported earnings continue to be weakened by one-off legacy items.

RBA reported a profit of £1.0bn for 3Q12, a 61% increase compared to £650m in 2Q12. For nine months to 30 September 2012 (9M12) the underlying profit increased 46% to £2.9bn, compared to £2.0bn for nine months to 30 September 2011 (9M11). On the other hand, the strong underlying results were masked by a set of one-off items, predominantly a £1.5bn fair value loss on own debt, as RBS’s credit spreads contracted (it is very common for the results to be hampered by fair value losses when markets are improving); and another £400m charge for mis-selling of payment protection insurance (see Table 1 for details).

Table 1

Key points to note:

  • RBS reported a £1.3bn pre-tax loss for 3Q12, a substantial increase from a £101m loss in 2Q12. In 9M12, the Bank reported a £1.8bn loss, a major increase from £1.2bn profit for 9M11. The large variance is attributable to exceptional performance in 3Q11, when RBS took a major gain on own credit adjustments in the deteriorating market
  • Retail & Commercial delivered a profit of £1.6bn in 3Q12, an 8% increase from £1.5bn in 2Q12, driven by somewhat stable performance in all divisions.  Ulster Bank is still a drag, reporting a £242m loss, yet stable on a quarterly basis
  • The Bank’s impairment losses were £1.2bn, a 12% reduction compared to £1.3bn in 2Q12. Overall, the impairments are steadily reducing; evidenced by a 33% decline in 9M12 to £3.8bn, compared to £5.7bn in 9M11 (see Table 1). Loan impairment charges represent 1.0% of customer loans and advances (excluding reverse repurchase agreements)
  • RBS made excellent progress in strengthening its balance sheet: deleveraging, improving liquidity and capital ratios while reducing wholesale funding
    • Further £7bn non-core asset run down achieved, with a total funded assets now at £65bn, a 75% reduction from £258bn at the end of 2008
    • Core Bank’s loan to deposit ratio stands at 91%, making RBS fully funded by deposits. The Group’s ratio is 102%, in line with its UK peers
    • Liquidity buffer, comprising of cash at central banks, eligible government and other debt, stood at £147bn
    • Total wholesale funding was £159bn, of which £49bn or 31% was short term. The liquidity buffer is 3 times short term wholesale funding. In comparison to 2008, when short term funding was at £297bn or 67% of a total of £446bn funding, and the liquidity buffer was only £90bn, this highlights a more conservative strategy and a much stronger balance sheet from RBS
    • Core Tier 1 ratio was 11.1%, or 10.4% excluding the effect of Asset Protection Scheme (APS) relief. A fully phased in Basel 3 ratio is of between 9.0% - 9.5% is expected by end 2013

Other developments:

  • In mid-October RBS announced its exit from the UK government Asset Protection Scheme. RBS will have paid £2.5bn for its participation, without even making a claim. RBS also paid around £1.5bn for liquidity support received during crisis. In its announcement, RBS indicated that this early exit demonstrates progress the Bank made in transforming its balance sheet
  • RBS completed an initial public offering of Direct Line Group, selling almost 520m shares generating gross proceeds of £911m. It is in line with its previous plan to divest control of Direct Line Group in stages by 2014, according to the European Commission (EC) state aid requirements
  • Santander pulled out of its £1.65bn deal to purchase certain UK branch based businesses and while disappointing, RBS has recommenced its effort to divest the business and fulfil its obligations to the EC
  • Following the ongoing Libor-fixing scandal investigation, RBS is expecting to start settlement negotiations in the near future and believes it will probably incur some financial penalties

RBS bonds



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