Key Takeaways From RBS’s Q4 Results

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

Royal Bank of Scotland Group Plc (NYSE: RBS) announced its fourth quarter and full-year 2018 resultsrecently. After returning to profitability in 2017, the bank reported an attributable profit of £1.6 billion, more than double that of fiscal 2017, and delivered its first Q4 profit in 8 years. The bank also declared dividend of 2 pence per share for the first time in 10 years.

RBS’s net revenue increased by 2%, and total operating expenses declined by approximately 7% year over year, leading to an improvement in its net margin figure from 6% in 2017 to 12% 2018. We currently have a price estimate of $8 per share for RBS, which is ahead of the current market price. We have summarized the key takeaways in our interactive dashboard on RBS’s Q4 Earnings Overview, the key parts of which are captured in the charts below. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Financial Services company data.

Segment Performance

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Despite an uncertain economic outlook, RBS delivered a strong financial performance in 2018, improving over its 2017 numbers. Key takeaways of the bank’s 2018 performance are presented below:

  • Net interest income and net fee & commission income – constituting 80% of the bank’s revenue – declined by approximately 3.7%, and revenue from other income increased by approximately 41% year over year, leading to an overall 2% increase in the bank’s total revenue.
  • RBS’s investment banking division had a profitable 2018, as securities trading revenues increased by approximately 30% from 2017, contributing 9% of total revenues. This shows that RBS has been successful in achieving its objective of shrinking its investment banking operations, which were responsible for more than 60% of the bank’s revenues in 2007. We expect these revenues to largely remain in the 5-10% range of total revenues going forward, as growth is primarily driven by traditional loans-and-deposits activities.
  • Operating expenses fell by approximately 7% in 2018 as the bank remained on course to achieve its cost to income ratio target of less than 50%. The bank has been able to reduce its costs by more than £4 billion in the previous 5 years.
  • RBS’s total loan portfolio declined from approximately £327 billion in 2017 to £323 billion in 2018. However, the bank’s UK Personal & Banking business loan portfolio, constituting approximately 51% of its total loan portfolio, remained stable. The bank’s total asset base shrunk from £738 billion in 2017 to a low of £695 billion at the end of 2018 as a result of a decline in total loans, trading assets and derivative securities. That said, the bank is in a strong financial position, as evident from its Common Equity tier 1 ratio of 16.2%.

 

Outlook for 2019

RBS declared dividends for the first time in a decade, and is expected to maintain ordinary dividends of around 40% of attributable profit. The bank also plans to buy back its shares from the UK government by utilizing surplus capital, as the UK Government plans fully to exit its stake in RBS by 2024. RBS remains on course to achieve its 2020 Return on Tangible Equity target of more than 12%. However, the bank might not be able to achieve its 2020 cost to income ratio target of less than 50% due to ongoing economic and political uncertainty, and the additional ongoing costs associated with ring-fencing and Brexit. The bank had planned in advance for risks expected to arise as a result of uncertainties related to Brexit by charging an additional £100 million in impairment charges in Q3 2018, and as of now RBS seems to be largely prepared for Brexit (whatever it ends up looking like).

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