The RBS Group (NYSE:RBS) released earnings last week, and the banking group’s results mirrored the trend demonstrated by competitors Barclays (NYSE:BCS), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) earlier – of an overall improvement in earnings marred by a huge accounting charge from the revaluation of its debt. ((2012 Q1 Interim Management Statement, RBS Company Announcements, May 4 2012)) Operationally, this quarter for RBS was actually the best for in at least 3 years with the operating profit of £1.8 billion ($2.9 billion) helped up by an improvement in revenues across divisions coupled with a reduction in impairment losses. The growth can be attributed to the U.K.-based bank’s Markets business.
The better-than-expected investment banking performance prompted us to raise our price estimate for RBS’s stock slightly from $8.60 to $8.70.
Trading Business Steals The Spotlight
Early this year, RBS announced its decision to revamp its Markets business completely – focusing almost completely on fixed-income trading and reducing equity-trading operations to a minimum. The move, largely stemming from the increased pressure from the British government, cast doubts about the profitability of the trading business as a whole.
But the results announced should help address most of these doubts. The bank’s fixed-income and currencies trading operations raised £1.6 billion ($2.6 billion) of the £1.7 billion ($2.7 billion) in revenues reported by the bank’s Markets business. And the fact that this figure is the highest since Q1 2011 is notable.
RBS Unable To Stem Ulster Losses, Though
Ulster Bank, the group’s retail banking business in Ireland, continues to remain a source of concern. The division has seen a decline in its revenues quarter after quarter for well over 2 years now, with the exception of Q3 2011. While Ireland’s poor economic condition is not helping the top-line, the situation is made worse by the piling impairment costs. For the quarter, impairments related to Ulster were at £394 million ($633 million) – the second highest in a 3-year period. The magnitude of the impairments, and how the affect RBS’s results can be understood from the fact that these impairments are nearly twice the size of the division’s revenue. In fact, Ulster bank contributed to under 3% of the group’s total revenue, while being responsible for almost 30% of the group’s total impairments.