REG - Royal Bk Scot.Grp. - 1st Quarter Results <Origin Href="QuoteRef">RBS.L</Origin> - Part 3
15/07/2015 15:25
- Part 3: For the preceding part double click ID:nRSd7782Lb
(116) - - (129)
- indirect 10 (2) 8 (1) - (1) (26) 19 - - -
Operating expenses (865) (145) (1,010) (409) (199) (608) (1,012) (199) (500) (79) (3,408)
Profit/(loss) before impairment losses 598 56 654 361 74 435 339 6 217 (6) 1,645
Impairment (losses)/releases (88) (47) (135) (40) 1 (39) (6) (1) (73) (108) (362)
Operating profit/(loss) 510 9 519 321 75 396 333 5 144 (114) 1,283
Additional information
Operating expenses - adjusted (£m) (2) (875) (143) (1,018) (408) (199) (607) (973) (102) (500) (79) (3,279)
Operating profit/(loss) - adjusted (£m) (2) 500 11 511 322 75 397 372 102 144 (114) 1,412
Return on equity (3) 22.0% 1.0% 15.2% 9.7% 13.4% 10.2% 4.4% nm 4.7% nm 11.6%
Return on equity - adjusted (2,3) 21.6% 1.2% 14.9% 9.7% 13.4% 10.3% 5.0% nm 4.7% nm 12.6%
Cost:income ratio 59% 72% 61% 53% 73% 58% 75% nm 70% nm 67%
Cost:income ratio - adjusted (2) 60% 71% 61% 53% 73% 58% 72% nm 70% nm 65%
Funded assets (£bn) 132.8 26.0 158.8 89.6 21.1 110.7 286.6 90.4 75.7 24.3 746.5
Total assets (£bn) 132.8 26.2 159.0 89.6 21.2 110.8 547.0 92.1 76.1 38.8 1,023.8
Risk-weighted assets (£bn) 48.5 28.7 77.2 63.5 12.0 75.5 140.2 19.6 61.3 40.5 414.3
RWA equivalent (£bn) (4) 50.6 23.6 74.2 70.7 12.0 82.7 141.0 19.3 61.3 50.9 429.4
Net loans and advances to customers (£bn) 125.5 23.2 148.7 84.9 16.7 101.6 70.5 0.6 52.7 18.3 392.4
Risk elements in lending (£bn) 4.5 4.7 9.2 3.4 0.3 3.7 0.1 0.1 1.3 23.0 37.4
Impairment provisions (£bn) (2.9) (3.4) (6.3) (1.3) (0.1) (1.4) (0.2) (0.1) (0.5) (15.7) (24.2)
Customer deposits (£bn) 144.6 21.1 165.7 87.6 36.6 124.2 57.1 1.0 54.9 1.5 404.4
Employee numbers (FTEs - thousands) 25.2 4.6 29.8 7.3 3.3 10.6 4.4 52.3 18.5 1.1 116.7
nm = not meaningful
Notes:
(1) Central items include unallocated transactions, principally Treasury AFS portfolio sales (Q1 2015 - £27 million loss; Q4 2014 - £6 million gain; Q1 2014 - £203 million gain) and profit and loss on hedges that do not qualify for hedge accounting.
(2) Excluding restructuring costs and litigation and conduct costs.
(3) Segmental return on equity based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average RWA equivalents (RWAe)).
(4) RWAe is an internal metric based on target CET 1 ratio of 13%, for all segments except RCR, set at 10% at creation. RWAe converts performing and non-performing exposures into a consistent capital measure comprising RWAs and capital deductions.
Segment performance
Q1 2015 compared with Q4 2014
UK Personal & Business Banking
● UK PBB upgraded its mortgage platform and increased the number of mortgage advisors by 91 or 12% to 835 compared with the start of 2015, strengthening its capacity to support UK housebuyers. Further steps were taken to enhance customer experience in digital channels, including fingerprint log-in to the mobile banking app.
● Operating profit was £348 million compared with a loss of £43 million in Q4 2014, with lower operating expenses and conduct costs only partly offset by lower income. Adjusted operating profit grew by £107 million to £732 million.
● Total income declined by £80 million to £1,452 million, driven by lower day count and other seasonal factors, increased internal funding costs and a slightly lower overall asset margin.
● Operating expenses decreased by £404 million to £1,130 million with a £296 million decrease in conduct costs, absence of UK bank levy, non-repeat of write-offs of intangible assets and continued efficiency savings.
● New mortgage applications grew by 42% to £6.6 billion. Business and personal loans saw positive momentum as business and consumer confidence continue to improve. Net loans and advances to customers increased by £0.2 billion to £127.4 billion with mortgage balances growing £0.4 billion in the quarter to £103.6 billion.
● Net impairment releases totalled £26 million compared with a net impairment charge of £41 million in Q4 2014 driven by provision releases in business banking.
Ulster Bank
● Ulster Bank made further progress during Q1 2015 to enhance its customer service offering. A fully digital account opening option was introduced for personal customers in Northern Ireland, speeding up and simplifying the account opening process. The announcement of a new partnership with 'An Post' in the Republic of Ireland will provide customers with 1,140 new points of presence. The bank's award winning customer contact centre announced 350 new jobs which will handle customer calls across a number of RBS
brands.
● A significant weakening in the euro relative to sterling during Q1 2015 had a material impact on Ulster Bank's financial comparisons with prior periods.
● Operating profit decreased by £118 million to £51 million in Q1 2015, primarily driven by the impact of exchange rate movements and a lower net impairment release, down £104 million, with the Q4 2014 release benefiting from improved property values. Adjusted operating profit was £50 million compared with £146 million in Q4 2014.
● Total income decreased by £14 million to £190 million primarily driven by the weakening of the euro. Excluding the impact of the exchange rate movement, total income declined by £4 million principally reflecting fewer days in the quarter.
● Operating expenses, stable at £139 million, were affected by the weakening of the euro. Excluding the impact of the exchange rate movement, operating expenses increased by £4 million reflecting the non-repeat of a number of specific items included in Q4 2014, notably the release of litigation and conduct provisions offset by the UK bank levy.
Segment performance
Q1 2015 compared with Q4 2014 (continued)
Commercial Banking
● During Q1 2015 Commercial Banking continued to simplify customer experience, including further enhancements to the end to end lending process, quicker and simpler account opening and 90 'simplifying customer life' suggestions implemented.
● On 1 January 2015, the Private Banking RBSI business, accounting for £18 million of operating profit in the quarter, was transferred to Commercial Banking(1). This transfer affects comparisons with prior quarters.
● Operating profit was £412 million compared with £248 million in the previous quarter. This benefited from the £18 million operating profit relating to the business transferred from Private Banking and the absence of litigation and conduct costs.
● Total income was £822 million (including £38 million transferred from Private Banking). The reduction reflected lower fair value and disposal gains and fewer days in the quarter.
● Operating expenses were lower at £409 million (including £20 million relating to the business transferred from Private Banking), primarily due to the non-repeat of Q4 2014 charges in relation to the UK bank levy and a charity donation, lower headcount and cost saving initiatives. Benign credit conditions resulted in lower net impairment losses, down £32 million.
● Net loans and advances to customers were £88.8 billion at 31 March 2015, including £2.4 billion of balances transferred from Private Banking. Adjusting for this transfer, Commercial Banking achieved £1.3 billion lending growth. Deposits of £99.0 billion at 31 March 2015 included £6.2 billion transferred from Private Banking. Adjusting for this transfer, deposits were £6.0 billion higher including very short term funds placed by customers in anticipation of imminent business transactions.
Private Banking
● Private Banking reached an agreement to sell International Private Banking to Union Bancaire Privée (UBP). Clear priorities have been set to drive the retained business, with improvements already being seen through the level of client engagement, general credit awareness and cross referrals.
● On 1 January 2015, the Private Banking RBSI business was transferred to Commercial Banking(1). This transfer affects comparisons with prior quarters.
● Operating profit was £28 million, benefiting from lower litigation and conduct costs. Q4 2014 included £13 million operating profit relating to the Private Banking RBSI business transferred to Commercial Banking.
● Total income of £214 million in part reflected the maturity of high interest term hedges on notice accounts. Q4 2014 income included £42 million relating to the business transferred to Commercial Banking.
● Operating expenses of £187 million benefited from lower conduct and litigation charges together with the non-repeat of Q4 2014 charges in relation to the UK bank levy, partially offset by higher property costs.
● Assets under management increased by £0.9 billion, benefiting from positive market and exchange rate movements.
Note:
(1) The business transfer included: Q1 2015: £38 million total income and £20 million total expenses, £2.4 billion net loans and advances, £6.2 billion deposits and £1.5 billion RWAs. Q4 2014: £42 million total income and £29 million total expenses including impairments, £2.6 billion net loans and advances, £6.5 billion deposits and £1.4 billion RWAs. Q1 2014: £33 million total income and £25 million total expenses, £2.6 billion net loans and advances, £6.7 billion deposit and £1.4 billion RWAs. Comparatives
have not been restated.
Segment performance
Q1 2015 compared with Q4 2014 (continued)
Corporate & Institutional Banking
● The new Corporate & Institutional Banking (CIB) leadership team has commenced implementation of its plan, announced on 26 February 2015, to create a simpler, more focused CIB. Following the announcement a substantial majority of customers have been reached by our customer contact programme. This programme explained our core product offering to go-forward customers and reassured others that we will continue to treat them fairly and honour our commitments.
● Operating loss increased by £98 million to £741 million reflecting higher restructuring, litigation and conduct costs, partially offset by increased income and the impact of the net impairment releases in Q1 2015. Adjusted operating profit was £50 million, compared with a loss of £173 million in Q4 2014.
● Total income increased by £113 million to £804 million reflecting stronger performance in Rates and Credit partly offset by lower income in Currencies.
● Operating expenses increased by £297 million to £1,589 million and included £500 million of litigation and conduct costs, compared with £382 million in Q4 2014, and £291 million of restructuring costs, compared with £88 million in Q4 2014.
● RWAs fell by £4.3 billion, reflecting the ongoing risk reduction.
Citizens Financial Group
● The secondary offering of Citizens Financial Group (CFG) was successfully completed at the end of March, resulting in the sale of 155 million shares of common stock, valued at $3.7 billion. Combined with a $250 million preferred stock issuance and 10.5 million common stock share repurchase in early April, RBS's ownership interest in CFG was reduced to 40.8%.
● Operating profit increased by £80 million ($111 million), or 45% (40%), to £257 million ($389 million) due to lower total expenses and impairment losses. Excluding restructuring costs and the depreciation and amortisation change(1), operating profit was up £14 million ($12 million), or 7% (4%).
● Total income increased by £31 million, or 4% to £797 million; on a US dollar basis total income was broadly flat with lower net interest income offset by higher non-interest income. Net interest income was impacted by two fewer days in the quarter and increased senior debt and deposit costs offset by an increase in loans and a reduction in pay-fixed swap costs. Seasonally lower non-interest income was offset by higher gains on the sale of mortgage loans and securities gains.
● Operating expenses, excluding restructuring costs and the depreciation and amortisation change, increased by £26 million, or 5% to £547 million. In US dollar terms operating expenses remained flat driven by good expense discipline.
● Impairment losses decreased £9 million ($15 million), or 19% (21%), to £38 million ($58 million) as the benefit of continued improvement in asset quality, a reduction in net charge-offs and a commercial recovery was somewhat offset by the effect of loan growth.
● Average loans and advances were up 7% (2% on a US dollar basis) driven by strength in commercial, auto, student and mortgage loans partially offset by home equity run-off.
● Average customer deposits were up 6% (1% on a US dollar basis) given growth across all deposit categories.
Note:
(1) Starting Q1 2015, as it is a disposal group, CFG will no longer charge depreciation and amortisation.
Segment performance
Q1 2015 compared with Q4 2014 (continued)
RBS Capital Resolution
● Consistent with our asset management principles, the operating focus in the quarter continued to be on capital intensive positions to maximise the capital accretion benefit and ensure this was achieved in an economic manner.
● RCR funded assets fell to £11 billion, a reduction of £4 billion, or 25%, during the quarter. The reduction was primarily achieved by disposals, supplemented by repayments.
● RCR remains on target to reduce funded assets by 85% to £5.7 billion, by the end of 2015, a year ahead of plan.
● Disposal activity was across all sectors, with the most notable reductions in the Corporate and Ulster Bank asset management groups and continued to benefit from a combination of market liquidity and asset demand in specific sectors.
● RWA equivalent reduction of £6 billion to £22 billion reflects a combination of disposals and repayments partially offset by the impact of impairment releases.
● Operating profit for the quarter was £181 million. The disposal strategy and favourable market and economic conditions resulted in impairment releases of £109 million. Other operating income of £117 million was primarily driven by disposal gains and fair value adjustments.
● The net effect of the operating profit of £181 million and RWA equivalent reduction of £6 billion(1) was CET1 accretion of £0.7 billion in the quarter.
Note:
(1) Capital equivalent: £0.6 billion at an internal CET1 ratio of 10%.
Central items
● Central items not allocated represented a charge of £211 million in the quarter compared with a charge of £622 million in Q4 2014. The change reflects lower Treasury funding costs, including volatile items under IFRS, which was a £108 million charge in the quarter versus £323 million in the previous quarter. In addition, Q4 2014 included a £247 million write-down of previously capitalised software expenditure.
Q1 2015 compared with Q1 2014
UK Personal & Business Banking
● Operating profit decreased by £162 million to £348 million reflecting higher conduct costs of £354 million. Adjusted operating profit increased by £232 million to £732 million with lower impairments and improvements in efficiency partly offset by lower income.
● Total income declined by £11 million to £1,452 million with lower asset income as the personal unsecured book continued to contract, and with lower fee income driven by lower packaged account, investment advice and credit card income. This was only partly offset by improvements in deposit income.
● Operating expenses increased by £265 million to £1,130 million driven by additional conduct and restructuring costs of £384 million partly offset by continued improvements in underlying efficiency and non-repeat of technology write-off.
● Net impairment releases totalled £26 million compared with a net impairment charge of £88 million in Q1 2014 reflecting continued improvements in asset quality and portfolio provision releases particularly in business banking.
● Gross new mortgage lending totalled £3.7 billion in the quarter supporting net mortgage growth of 3% to £103.6 billion. New mortgage applications accelerated towards the end of the quarter with volume in March up 10% year on year. Deposits grew by 2% to £148 billion.
● RWAs were 12% lower at £43 billion as asset quality continued to improve.
Segment performance
Q1 2015 compared with Q1 2014 (continued)
Ulster Bank
● A significant weakening in the euro relative to sterling during Q1 2015 had a material impact on Ulster Bank's financial comparisons with prior periods.
● Operating profit increased by £42 million to £51 million in Q1 2015, benefiting from the absence of net impairment losses supported by an enhanced collections performance and improved economic metrics. Adjusted operating profit was £50 million compared with £11 million in Q1 2014.
● Total income decreased by £11 million to £190 million as a result of the weakening of the euro. Excluding the impact of the exchange rate movement total income increased by £5 million reflecting a continued improvement in deposit margins, stable loan product pricing and growth in new lending volumes. Net interest margin declined by 34 basis points reflecting a lower return on free funds coupled with a significant increase in the bank's low yielding liquid asset portfolio.
● Operating expenses decreased by £6 million to £139 million as a result of the weakening of the euro. Excluding the impact of the exchange rate movement, operating expenses increased by £1 million with higher pension charges and an investment in technology and operational improvements largely offset by savings from lower staff numbers and a reduced property footprint.
● Excluding the impact of exchange rate movements, net loans and advances to customers and customer deposit balances were broadly stable. New lending activity has continued to increase with mortgage drawdowns up 55% versus Q1 2014, reflecting the improvement in macro economic conditions.
● RWAs declined by £6.3 billion to £22.4 billion reflecting further improvements in credit metrics coupled with the impact of exchange rate movements.
Commercial Banking
● Comparisons are affected by the transfer of the Private Banking RBSI business to Commercial Banking on 1 January 2015(1).
● Operating profit was £412 million compared with £321 million reflecting lower impairments, continued focus on costs, lower headcount and the transfer of the Private Banking RBSI business.
● Total income was £822 million (including £38 million transferred from Private Banking) and benefited from deposit margin expansion. Q1 2014 results included Commercial Cards revenues, which were transferred to UK Personal & Business Banking in August 2014.
● Operating expenses in Q1 2015 were flat compared with Q1 2014, with the impact of continued focus on discretionary cost saving and lower headcount offset by costs transferred from the Private Banking RBSI business.
● The net impairment loss of £1 million included a reduction in individual and collective charges, down £26 million, and a net latent release in Q1 2015 of £13 million.
Note:
(1) The business transfer included: Q1 2015: £38 million total income and £20 million total expenses, £2.4 billion net loans and advances, £6.2 billion deposits and £1.5 billion RWAs. Q4 2014: £42 million total income and £29 million total expenses including impairments, £2.6 billion net loans and advances, £6.5 billion deposits and £1.4 billion RWAs. Q1 2014: £33 million total income and £25 million total expenses, £2.6 billion net loans and advances, £6.7 billion deposit and £1.4 billion RWAs. Comparatives
have not been restated.
Segment performance
Q1 2015 compared with Q1 2014 (continued)
Private Banking
● Comparisons are affected by the transfer of the Private Banking RBSI business to Commercial Banking on 1 January 2015(1).
● Operating profit was £28 million and was adversely affected by the maturity of higher interest rate hedges in December 2014 and lower investment and transactional income reflecting repricing of investment products and lower customer activity. Q1 2014 included £33 million of income and £25 million of expenses relating to the business transferred to Commercial Banking.
● Assets under management increased by £0.7 billion, benefiting from positive market and exchange rate movements.
Corporate & Institutional Banking
● Operating loss totalled £741 million, compared with a profit of £333 million in Q1 2014. This reflected lower income and higher restructuring, litigation and conduct costs, partially offset by lower adjusted expenses. Adjusted operating profit was £50 million, compared with a profit of £372 million in Q1 2014.
● Total income declined by £547 million to £804 million. This reflected the reduction in resources deployed, most notably in Credit which included the US asset-backed products business. Currencies initially incurred losses following the removal of the Swiss franc's peg to the euro, but this was mitigated by gains from increased volatility in Currency Options. Rates also benefited from heightened volatility and from the commencement of quantitative easing by the European Central Bank.
● Operating expenses increased by £577 million to £1,589 million and included £500 million of litigation and conduct costs, compared with nil in Q1 2014, and £291 million of restructuring costs, compared with £39 million in Q1 2014. Adjusted expenses fell by 18% reflecting the ongoing drive to reduce costs and simplify the business.
● Net impairment releases totalled £44 million in Q1 2015 and were driven by a write-back of latent loss provisions, partially offset by a single name impairment.
● RWAs fell by £37 billion, reflecting the commitment throughout 2014, reinforced by the announcement in February 2015, to reduce the scale of CIB. The wind-down of US asset-backed products, in particular, generated a reduction of £13 billion.
Citizens Financial Group
● Total income was up £80 million ($19 million), or 11% (2%), from Q1 2014 despite an estimated £15 million ($25 million) reduction related to the Illinois franchise sale in Q2 2014 and an £11 million ($17 million) reduction in securities gains. Net interest income improvement was driven by the benefit of earning asset growth and a reduction in pay-fixed swap costs partially offset by continued pressure from the relatively persistent low rate environment on loan yields and mix and higher borrowing costs
related to debt issuances.
● Operating expenses, excluding restructuring costs and the depreciation and amortisation change, increased by £47 million, or 9%, to £547 million. In US dollar terms operating expenses were broadly flat. Q1 2014 included incentive reversals for prior year plans. This was offset by a decrease related to the Illinois divestiture.
Note:
(1) The business transfer included: Q1 2015: £38 million total income and £20 million total expenses, £2.4 billion net loans and advances, £6.2 billion deposits and £1.5 billion RWAs. Q4 2014: £42 million total income and £29 million total expenses including impairments, £2.6 billion net loans and advances, £6.5 billion deposits and £1.4 billion RWAs. Q1 2014: £33 million total income and £25 million total expenses, £2.6 billion net loans and advances, £6.7 billion deposit and £1.4 billion RWAs. Comparatives
have not been restated.
Segment performance
Q1 2015 compared with Q1 2014 (continued)
Citizens Financial Group (continued)
● Impairment losses decreased £35 million ($63 million), or 48% (52%), to £38 million ($58 million), reflecting improved credit quality and the effect of one large commercial recovery.
● Average loans and advances were up 18% (8% on a US dollar basis) due to commercial loan growth and retail loan growth driven by higher auto, residential mortgage and student loans partially offset by home equity run-off.
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