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Investment Overview for Royal Bank of Scotland (NYSE:RBS)
Below are key drivers of RBS's value that present opportunities for upside or downside to the current Trefis price estimate for the Royal Bank of Scotland Group:
U.K. Consumer Banking (RBS and NatWest)
- Mortgage Revenues as % of Outstanding Mortgages: Mortgage revenues from U.K. retail banking operations represent one of the largest revenue streams for RBS. These revenues as a percentage of outstanding revenues reached a low of 0.7% in 2008 at the peak of the global economic downturn. The figure has improved considerably to settle around 2.5% over recent years, and we expect it to largely revolved around the 2.2-2.3% level going forward. However, if U.K. slips into a recession over coming years as a result of Brexit, and if mortgage levels remained depressed over our forecast period, then the fee revenues could fall to below 1% again over the next couple of years and could gradually recover to a level of 2% by the end of the period. This scenario represents a 7% downside to the Trefis price estimate.
- Non-Interest Expenses as % of U.K. Consumer Banking Revenues: Non-interest expenses for RBS's U.K. retail banking operations were around 52% of the division's revenues pre-2008, but increased to 65% of total revenues over 2008-09 because of the downturn. These expenses have been higher over recent years as the bank incurred billion in legal costs related to the mis-selling of PPI and interest-rate derivative products and also from its restructuring activities - increasing the figure to an average of 80% over 2012-15. While we expect this figure to fall rapidly over coming years, elevated expense levels coupled with the slowdown from a potential Brexit could result in the figure remaining above 70% over the Trefis forecast period. This would represent a downside of 15% upside to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for RBS at the top of the page.
The Royal Bank of Scotland Group is the holding company of a global banking and financial services group. The company operates almost entirely in the United Kingdom, with a small retail and commercial banking presence in Republic of Ireland, Jersey, Guernsey, the Isle of Man, Gibraltar, U.S. and Western Europe. The group operates through its two principal subsidiaries: The Royal Bank of Scotland plc (the Royal Bank) and National Westminster Bank plc (NatWest).
Leading U.K. consumer bank
RBS's U.K. consumer banking business, under the RBS and NatWest brands, is a market leader in the country. It had nearly $184 billion of mortgage, credit card and other consumer and business loans outstanding (on an average basis) in 2015, generating a net interest yield of about 3.7%. Additionally, the risk profile of its customers has been reasonable for the most part, as it reported a release in loan provision for 2015.
U.K. government involvement
In October 2008, RBS accepted effective nationalization by the U.K. government. RBS had been the largest bank in the U.K. by assets, so when many of the bank's assets turned out be "toxic" (non-performing) in the wake of the U.S. financial crisis, the U.K. government took a nearly 83% ownership of the bank through a capital injection. While the government has reduced this stake to 73% now, its involvement as a majority shareholder means that it will continue to dictate the bank's activities (and risks) to a great extent over coming years.
Brexit may severely impact RBS's operations over coming years
With the U.K. currently working on plans to exit the European Union, the country's banking industry is likely to witness a sharp reduction in activity through the ensuing phase of uncertainty. The possibility of a recession in the region only makes things worse for British banks like RBS. In such a scenario, the Bank of England, which has maintained interest rates at near-zero levels since the economic downturn of 2008 may even consider negative interest rates - straining already weak net interest margin figures for the banks over coming years.
British Government's ratification of the ICB's recommendation have forced drastic changes in RBS's business model
With the British government backing the stringent recommendations for U.K.-based banks laid out by the ICB in late 2011, the legislation will be enforced over coming years. RBS has almost completely wound down its investment banking operations, and will have to "ring-fence" its core retail banking business from the now small investment banking operations.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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