RBS Getting Back on Track with Help from UK Banking Operations

RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

The Royal Bank of Scotland (RBS) Group (NYSE:RBS) recently announced its performance for the year 2010. Coming out of the global economic recession, the company reported net losses for the third consecutive year. The loss attributable to shareholders was $1.7 billion for 2010 – although this figure is a significant improvement over the 2008 figure of $36 billion. RBS competes with other worldwide banking institutions and financial services group like Citigroup (NYSE:C), Barclays (NYSE:BCS), Bank of America (NYSE:BAC), UBS (NYSE:UBS) and JPMorgan Chase (NYSE:JPM).

Based on its performance for 2010, we have updated our price estimate for RBS to $13.41. This figure is about 5% below the current market price for the company’s stock.

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The RBS group is the holding company of a global banking and financial services group. The company operates in the United Kingdom, the United States, and internationally through its two principal subsidiaries, The Royal Bank of Scotland plc (the Royal Bank) and National Westminster Bank plc (NatWest).

UK Banking Business Appears to Have Emerged from the Shadows of Recession

Our analysis for RBS indicates that the company’s UK retail and corporate banking operations contribute to 30% and 13% of its total value, respectively. These divisions remained profitable even through the period of recession. The calculated gross income for both these division was in excess of $2.1 billion each for 2010.

The fact that the UK banking business has recovered considerably is evident from the net interest yield for the banking operations. While corporate banking recorded pre-recession margins of 2.51%, the retail banking arm achieved an unprecedented interest yield of 3.91%. The retail banking division also saw an increase in the amount of loans advanced.

See our full analysis and $13.41 price estimate for RBS

We believe the amount of loans outstanding will grow at a rate of 5% annually to reach $228 billion by the end of our forecast period. We also expect the division to generate yields close to 4% in the years to come. These factors, coupled with an improvement in cost efficiency, reduction in impairment losses and a decrease in the value of risk-weighed assets are expected to contribute to the company’s value in a sustainable manner.

Note: RBS reports its earnings in GBP. The reported figures have been converted to USD using the 2010 exchange rate of 1.5524 provided by the company.