RBS Faces Slow Growth After Disappointing Quarter


Royal Bank of Scotland’s terrible fourth quarter, which resulted in a GBP 2.6 billion loss, looks like a kitchen-sink quarter, with management taking big charges in an effort to start 2013 with a cleaner slate. Fourth-quarter results included GBP 1,150 million of additional redress costs related to misselling scandals, GBP 620 million of restructuring costs, and GBP 518 million of goodwill writedowns.

Similarly, the full-year loss of GBP 6.0 billion included GBP 8.8 billion of special and one-time items. On a management-provided underlying basis, the no-moat bank reported an operating profit for both the fourth quarter and the full year, albeit a subpar one.

For the full year, underlying return on equity was 9.8% in the core division, and the noncore division narrowed its operating loss by 32% to GBP 2.9 billion. However, we think further increases in underlying profitability will be more challenging–the bank saw a 7% sequential fall in core operating profits in the fourth quarter and an accompanying 61% increase in the noncore operating loss as the U.K. economy stagnated. Indeed, management said that it expects to see more special charges in 2013 and that it aspires to be a “clean, normal” bank in 2014.

RBS’ results in its core division show that near-term profit growth may be difficult to come by. The 5% year-over-year increase in operating profit was driven by a 68% increase in markets. Most other divisions saw a year-over-year drop in operating profits, such as U.K. retail (down 6%) and U.K. corporate (down 7%), as net interest margins narrowed and loan growth remained near zero. Indeed, now that RBS has reached its target 100% loan/deposit ratio, we think finding profitable loan growth will be a key challenge for the core division.

While RBS is continuing to make progress on its noncore division (funded assets fell 40% in 2012 to GBP 57 billion), this division will continue to pose risks for long-term shareholders for some time. Management expects to reduce noncore funded assets to GBP 40 billion in 2013, but then progress will probably slow and it is likely that GBP 20 billion of noncore assets (equal to 30% of shareholder’s equity) will remain on the balance sheet indefinitely.


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