Why Did RBS Swing To A Loss In Q3 2019?

RBS (NYSE: RBS) reported a net loss of £315 million in Q3 2019, which compares to a net profit figure of £1.3 billion in Q2 2019. The reversal in fortunes for the British banking giant can be attributed to a pre-tax charge of £900 million from additional provisions for Payment Protection Insurance (PPI) (PPI, also known as credit insurance, is an insurance product that covers debt repayment for customers). Notably, the bank’s management stated that this figure accounts for all foreseeable claims that need to be paid, so no charges linked to this nagging issue are expected going forward. Also, the bank’s total revenue declined ~30% Q-on-Q as the top line was boosted by a one-time gain of £444 million from the Alawwal bank merger in Q2 2019.

Trefis breaks down the reasons for RBS’s net loss during the quarter in detail as a part of the interactive dashboard – Why RBS Reported A Loss of £315 Million In Q3 2019 Versus A Profit Of £1.3 Billion In Q2 2019? parts of which are highlighted below.

A detailed analysis of factors impacting RBS’s performance during the quarter :

#1 Net Income Took A Hit Of More Than £1.6 Billion

• RBS’s net income dropped from £1.33 billion in Q2 2019 to a net loss of £315 million in Q3 2019, marking a decline of £1.65 billion during the quarter.
• This decrease in profitability can be attributed to a £1.1 billion decrease in total revenues as well as a £500 million increase in total expenses.

#2 RBS’s Total Revenue Plunged By 30%

• RBS’s revenue tumbled by 30%, falling from £3.85 billion in Q2 2019 to £2.7 billion in Q3 2019. This decline can be attributed almost completely to a decrease in fees & other income of £1.2 billion, partially offset by an increase in net interest income as well as lower credit impairment charges.
• The bank’s fees and other income declined mainly due to the absence of £444 million gain relating to the Alawwal bank merger as well as the sub-par performance of the Natwest market which saw a 34% decrease in non-interest income.

#3 Total Expenses Grew 20% Due To One-Time Charges Related To Additional Provision For PPI

• Total expenses increased by £0.5 billion for Q3 primarily as a result of £0.9 billion charges related to the additional provision for Payment Protection Insurance. Notably, the management stated that RBS has made provisions totaling £6.2 billion for PPI claims, of which £5.0 billion had been utilized by Q3 2019.
• The primary reason for the surge in expenses was an increase in Litigation and conduct expenses, going up from £55 million in Q2 2019 to £750 million in Q3 2019.
• However, RBS’s strategic costs declined by nearly 50%, falling from £434 million in Q2 2019 to £215 million in Q3 2019.
• Additional details regarding other major expense items that moved during the quarter are available in our interactive dashboard.

We expect RBS’s adjusted EPS for full-year 2019 to be around $0.30 (with each U.S. ADR for the company representing 4 common shares). Using this figure with our estimated forward P/E ratio of 16.7x and a GBP-USD exchange rate of 1.3, this works out to a price estimate of $7 for RBS’s stock – roughly 10% ahead of the current market price.

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