Bloomberg News

RBS Sees ‘Difficult’ Outlook as Quarterly Profit Drops 63%

November 07, 2011

(Updates with closing share price in ninth paragraph.)

Nov. 4 (Bloomberg) -- Royal Bank of Scotland Group Plc, Britain’s biggest government-controlled bank, posted a bigger- than-estimated decline in third-quarter profit as Europe’s sovereign debt crisis eroded revenue from its securities unit.

Operating profit, excluding accounting gains from so-called debt valuation adjustments, fell 63 percent from the year- earlier period to 267 million pounds ($428 million), RBS said in a statement today. That missed the 343 million-pound median estimate of six analysts surveyed by Bloomberg.

“We expect difficult conditions to continue in the fourth quarter,” Chief Executive Officer Stephen Hester, 50, said in the statement. “The outlook for economic growth has been downgraded. Interest rates are likely to remain low for longer than originally forecast, and markets appear likely to remain volatile for some time.”

RBS’s investment-banking revenue slipped 29 percent to 1.1 billion pounds from the year-earlier period. The Edinburgh-based bank follows Deutsche Bank AG, Barclays Plc and UBS AG in posting lower investment-banking revenue as concern that Greece will default crimps income from trading and underwriting stocks and bonds in Europe. The lender signaled today it plans to cut more jobs at the securities unit to reduce costs.

“In each of the core product lines, revenues were substantially weaker than expected and costs remained elevated,” Carla Antunes-Silva, an analyst at Credit Suisse Group AG in London with a neutral rating on the stock, wrote in a note to clients.

Debt Gain

Revenue from the securities unit’s credit operations declined 73 percent in the third quarter from the year earlier. Fixed income and currencies slumped by 59 percent, while equities slid 42 percent, RBS said.

Net income was 1.23 billion pounds compared with a 1.15 billion-pound loss in the year-earlier period. That includes a 2.36 billion-pound gain on so-called credit valuation adjustment. That’s an accounting rule that requires banks to book losses when the value of their debt rises and gains when it declines on the theory that a loss, or profit, would be realized were the bank to repurchase that debt.

“The income statement was a miss, the balance sheet was a hit,” said Alex Potter, an analyst at Berenberg Bank in London. “In a market which is as risk-averse as this one seems to be, I’m much happier to see the balance sheet looking good,” said Potter. He rates the bank “buy” with a target price of 44 pence.

Shares Rise

RBS climbed 0.7 percent to 22.95 pence as of the close in London. The stock is down 41 percent this year. The government owns 83 percent of the bank, having paid an average 50.2 pence a share when it bailed out the lender in 2008.

Impairments for bad loans fell by 728 million pounds in the third quarter to 1.54 billion pounds. The loan-to-deposit ratio fell by 2 percentage points to 112 percent in the quarter, meaning the bank lent 112 pounds for every 100 pounds it took in deposits. At its worst in 2008, the ratio was 154 percent. The core Tier 1 capital ratio, a gauge of financial strength, rose to 11.3 percent from 11.1 percent at June 30.

“Despite the endless additional political and regulatory roadblocks placed in its way, against all the odds, RBS is, slowly but surely, making progress,” Ian Gordon, an analyst at Evolution Securities Ltd. in London, wrote in a note to clients.

Job Cuts

RBS, which has eliminated about 27,000 jobs since receiving the biggest banking bailout in the world, signaled today it will cut more posts. Costs as a proportion of the investment banking unit’s income jumped to 93 percent from 65 percent in the year- earlier period.

“The investment bank, in common with many other investment banks, will have to shrink further in order to be sustainable,” Hester told reporters on a call today. “With income very hard to grow we do need to go back and take a very close look at the costs base. We are doing that, and unfortunately that will affect jobs.” He declined to give an estimate for the number of reductions.

Pretax profit at the investment banking unit, overseen by John Hourican, fell 81 percent to 112 million pounds from 589 million in the same period of last year. By contrast, pretax profit at the U.K. retail unit, which includes NatWest, jumped 25 percent to 499 million pounds.

Long-Term Funds

The lender cut its holdings of central and local government debt of Portugal, Greece, Italy, Spain and Ireland to 1.1 billion pounds from 4.6 billion pounds at the start of the year. RBS also wrote down its holdings of Greek government debt to 37 cents on the euro after taking a 50 percent loss in the first half. The writedown cost the bank 142 million pounds.

The bank also met its target of raising 23 billion pounds in long-term funding for in 2012, and increased liquidity holdings to 170 billion pounds, more than its short-term funding requirements of 141 billion pounds.

“We expect that unsecured wholesale funding availability for banks generally will remain scarcer and more expensive than in the past, even when current uncertainties subside,” Hester said today.

The lender may take longer to reach its target of a 15 percent return on equity and a reduction in its cost income ratio to 50 percent by 2013 because of what he described as a “longer and bumpier” road to recovery, he said. The bank’s retail and commercial units posted a 16 percent return on equity and the securities unit an 11 percent return.

--Editors: Edward Evans, Keith Campbell.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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