The Royal Bank of Scotland Group (NYSE:RBS) announced its interim results for the year late last week, and the banking group ended the second quarter with an operating profit of £650 million ($1 billion).  This is almost half the figure of £1.2 billion ($1.9 billion) for the previous quarter and 22% lower than that for the same quarter last year. And, as we have seen in recent weeks for all the diversified international banks – especially the ones based in Europe like Barclays (NYSE:BCS), Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB) and UBS (NYSE:UBS) – poor trading revenues over the period are largely to blame for this decline. RBS, a 82% government-controlled banking group, continues to report final figures in the red – a trend seen for almost every single quarter since it was bailed out by the British government at the peak of the 2008 economic recession.
We maintain our $8.70 price estimate for RBS’s stock, which is about 25% ahead of its current market price. We believe the difference can largely be attributed to the fact that the bank is currently under investigation for its involvement in manipulating LIBOR in 2008. Rumors of a possible nationalization of the banking group, besides a deteriorating debt situation in the Euro zone are also responsible for the undervaluation to a large extent.
Turmoil in Capital Markets Reflects in Trading Revenues
Capital markets around the globe showed very high volatility for the larger part of the quarter, making it difficult for investment banks to generate trading profits. The impact is clearly visible on RBS’s markets revenues which fell to just above £1 billion ($1.56 billion) for the period from £1.7 billion ($2.65 billion) in Q1 2012 and £1.16 billion ($1.8 billion) in Q2 2011.
It must be mentioned here that the plethora of cost-cutting measures, including extensive job cuts, which RBS announced early this year seems to have helped. Operating expenses for the markets division fell to below £800 million ($1.25 billion) this quarter from above £900 million ($1.4 billion) in the previous quarter. Almost all the operating divisions of the bank saw improved margins, with the bank slashing jobs in each of the units.
Ulster Bank Hurts in More Than One Way This Time Around
The RBS Group’s banking services in Ireland through Ulster Bank continued to drag down the group’s results again this quarter. Besides the persisting impairment issue with the division owing to the slowdown in Ireland, a technical glitch in the division led to a loss of access for almost all of the bank’s 100,000+ customers who could not access their money or make payments.
RBS had to set aside another £323 million ($500 million) this quarter to cover impairments to Ulster Bank’s loan portfolio – a growing cause for concern because the bank has been charging impairments between £200 million and £400 million for its Ulster Bank operations almost every quarter for the last three years. The technical glitch is expected to cost Ulster Bank around £30 million ($50 billion) this year.Notes: