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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:
Sales, Trading & Investment Banking
- Income from Trading Activities: RBS historically generated trading-related revenues of around $8 billion each year. However those figures were distorted in 2008 and 2009 due to the economic downturn being followed by significant improvement in market conditions. While we currently forecast a modest growth in trading income following directives from the U.K. government for RBS to reduce its trading activities, there would be a 5% upside to the Trefis price estimate for a scenario in which trading income grows by 5% annually over the Trefis forecast period.
- Investment Banking Operating Margin: The operating margin for the division has historically been around 55%, and we forecast that they will settle around 40% by the end of the Trefis forecast period due to the aforementioned directives as well as a reduced risk profile. However, if the margins reach their historical average of around 55%, this would represent an 8% 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 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).
Both the Royal Bank and NatWest are United Kingdom clearing banks. The company’s business segments include: U.K. Retail, U.K. Corporate, Markets, International Banking, Ulster Bank, U.S. Retail and Commercial, Wealth and the soon to be spun-off Direct Line (Insurance) Group.
Leading UK consumer bank
RBS' UK consumer banking business, under the RBS and NatWest brands, is a market leader in the UK. It had nearly $180 billion of mortgage, credit card and other consumer loans outstanding (on an average basis) in 2011, generating a net interest yield of nearly 4%. Additionally, the risk profile of its customers has been reasonable for the most part, as its impairments were about 0.7% of loans outstanding in 2011, lower than many competitors.
UK government involvement
In October 2008, RBS accepted effective nationalization by the UK government. RBS had been the largest bank in the UK by assets, so when many of the bank's assets turned out be "toxic" (non-performing), the UK government took nearly 83% ownership of the bank through a capital injection as well as preferred shares which were later converted to common stock. While the government plans to wind down its position over time, its involvement means that it will likely dictate the bank's activities (and risks) to an extent.
Economic recovery to stimulate wealth management industry
As economic conditions eventually improve, we expect that investors' risk appetites will also increase, which should drive investment and demand for wealth management services. Long term trends, including the ongoing shift from state pension dependency to private retirement funding, aging populations in mature markets, and growing wealth in emerging economies, will also positively impact revenues and assets under management.
ICB directive could force changes in business model
The British government ratified the stringent recommendations for UK-based banks laid out by the ICB late in 2011. The legislation will be enforced by 2015, with UK banks facing several difficult decisions owing to the "ring-fencing" recommendation that seeks to separate retail and 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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