REG - Royal Bk Scot.Grp. - Half Yearly Report - Part 1 <Origin Href="QuoteRef">RBS.L</Origin> - Part 4
29/10/2014 09:16
- Part 4: For the preceding part double click ID:nRSA9698Nc
· Expenses, excluding restructuring costs, remained stable. Restructuring costs increased by £10 million as Ulster Bank continued to adjust its property footprint. The adjusted cost:income ratio improved by 3 percentage points to 68% driven by higher income.
· Impairment losses decreased by £37 million largely due to the release of a provision on a segment of the corporate portfolio. Within the mortgage portfolio, a change to the treatment of arrears capitalisations led to a 6% increase in risk elements in lending and a shift in the provisioning of these cases from latent to collective. This, coupled with improving credit metrics, contributed to a £102 million latent provision release in Q2.
· Loan:deposit ratio improved from 110% to 108%.
Q2 2014 compared with Q2 2013
· A significant reduction in impairment losses was the key driver of the £256 million improvement in operating profit. Adjusted operating profit was up £225 million to £58 million.
· Total income decreased by £29 million primarily due to a number of substantial one-off gains in Q2 2013 in non-interest income. Net interest income increased by £17 million to £169 million largely driven by initiatives to reduce Ulster bank's funding costs. Net interest margin increased by 51 basis points reflecting improved deposit margins coupled with the impact of the asset transfer to RCR.
· Expenses reduced by £32 million largely due to a reduction in litigation and conduct costs. Excluding restructuring, litigation and conduct costs, expenses were flat with the benefit of lower headcount offset by the cost realignment following the creation of RCR, £11 million, and the introduction of the new bank levy in the Republic of Ireland, £4 million.
· Impairment losses improved by £253 million or 96%, reflecting stronger credit metrics across all portfolios.
Commercial & Private Banking
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
£m £m £m £m £m
Income statement
Net interest income 1,343 1,253 685 658 643
Net fees and commissions 620 657 311 309 334
Other non-interest income 150 170 74 76 101
Non-interest income 770 827 385 385 435
Total income 2,113 2,080 1,070 1,043 1,078
Direct expenses
- staff (426) (427) (213) (213) (215)
- other (155) (175) (74) (81) (94)
Indirect expenses (606) (629) (293) (313) (317)
Restructuring costs
- direct (42) (15) (42) - (8)
- indirect (23) (19) (22) (1) (11)
Litigation and conduct costs (50) (25) (50) - -
Operating expenses (1,302) (1,290) (694) (608) (645)
Profit before impairment losses 811 790 376 435 433
Impairment (losses)/recoveries (31) (289) 8 (39) (157)
Operating profit 780 501 384 396 276
Operating profit - adjusted (1) 895 560 498 397 295
Key metrics
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
Performance ratios
Return on equity (2) 12.9% 7.8% 12.8% 13.1% 8.6%
Return on equity - adjusted (1,2) 14.8% 8.7% 16.5% 13.1% 9.2%
Net interest margin 2.90% 2.69% 2.91% 2.89% 2.77%
Cost:income ratio 62% 62% 65% 58% 60%
Cost:income ratio - adjusted (1) 56% 59% 54% 58% 58%
Notes:
(1) Excluding restructuring costs and litigation and conduct costs.
(2) Return on equity is based on segmental operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs).
Commercial & Private Banking
30 June 31 March 31 December
2014 2014 2013
£bn £bn Change £bn Change
Capital and balance sheet
Loans and advances to customers (gross) 101.7 103.0 (1%) 101.8 -
Loan impairment provisions (1.3) (1.4) (7%) (1.6) (19%)
Net loans and advances to customers 100.4 101.6 (1%) 100.2 -
Funded assets 109.4 110.7 (1%) 108.9 -
Assets under management (Private Banking) 28.7 28.5 1% 29.7 (3%)
Risk elements in lending 3.1 3.7 (16%) 4.6 (33%)
Provision coverage (1) 40% 38% 200bp 38% 200bp
Customer deposits (excluding repos) 123.9 124.2 - 127.9 (3%)
Loan:deposit ratio 81% 82% (100bp) 78% 300bp
Risk-weighted assets (2)
- Credit risk
- non-counterparty 66.3 67.2 (1%) 69.7 (5%)
- counterparty 0.1 - - - -
- Market risk 0.1 - - 0.1 -
- Operational risk 8.3 8.3 - 8.0 4%
74.8 75.5 (1%) 77.8 (4%)
Notes:
(1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(2) Risk-weighted assets at 31 December 2013 are on a Basel 2.5 basis.
Key points
Commercial & Private Banking comprises parts of the former UK Corporate, Wealth and International Banking divisions. It is
committed to supporting the bank's ambition to be the number one bank for customer service, trust and advocacy in its
chosen markets by 2020. Commercial Banking's customers range from UK businesses with an annual turnover of £2 million up to
large UK corporations, including real estate and institutional customers. Aligning the Private Banking business with
Commercial Banking will enable the bank to better serve and connect those who own and run businesses.
With a set of strong brands including NatWest, Lombard, Coutts and Adam & Company, the Commercial & Private Banking
business provides its customers with dedicated relationship management and access to sophisticated products and services
including lending, speciality finance, transaction banking, risk management and wealth management.
During the remainder of 2014, the Private Banking and Commercial Banking teams will continue to join forces to increase
business in the UK.
Commercial Banking
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
£m £m £m £m £m
Income statement
Net interest income 999 936 511 488 484
Net fees and commissions 448 477 227 221 243
Other non-interest income 121 136 60 61 82
Non-interest income 569 613 287 282 325
Total income 1,568 1,549 798 770 809
Direct expenses
- staff (267) (254) (134) (133) (127)
- other (122) (145) (59) (63) (77)
Indirect expenses (401) (401) (189) (212) (205)
Restructuring costs
- direct (40) (14) (40) - (7)
- indirect (22) (15) (21) (1) (9)
Litigation and conduct costs (50) (25) (50) - -
Operating expenses (902) (854) (493) (409) (425)
Profit before impairment losses 666 695 305 361 384
Impairment (losses)/recoveries (31) (282) 9 (40) (155)
Operating profit 635 413 314 321 229
Operating profit - adjusted (1) 747 467 425 322 245
Note:
(1) Excluding restructuring costs and litigation and conduct costs.
Commercial Banking
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
£m £m £m £m £m
Analysis of income by business
Commercial lending 894 962 448 446 501
Deposits 153 88 81 72 50
Asset and invoice finance 366 334 186 180 170
Other 155 165 83 72 88
Total income 1,568 1,549 798 770 809
Analysis of impairments by sector
Commercial real estate (6) 162 (17) 11 100
Asset and invoice finance 2 6 - 2 5
Private sector education, health, social work,
recreational and community services (10) 63 - (10) 40
Banks & financial institutions 1 2 (1) 2 -
Wholesale and retail trade repairs 14 3 2 12 (4)
Hotels and restaurants (1) 19 (4) 3 8
Manufacturing 7 (4) 4 3 (5)
Construction 4 (1) 2 2 (4)
Other 20 32 5 15 15
31 282 (9) 40 155
Loan impairment charge as % of gross
customer loans and advances by sector
Commercial real estate (0.1%) 1.5% (0.4%) 0.2% 1.8%
Asset and invoice finance - 0.1% - 0.1% 0.2%
Private sector education, health, social work,
recreational and community services (0.3%) 1.6% - (0.5%) 2.1%
Banks & financial institutions - 0.1% (0.1%) 0.1% -
Wholesale and retail trade repairs 0.5% 0.1% 0.1% 0.8% (0.3%)
Hotels and restaurants (0.1%) 0.9% (0.5%) 0.3% 0.7%
Manufacturing 0.4% (0.2%) 0.4% 0.3% (0.5%)
Construction 0.4% (0.1%) 0.4% 0.4% (0.7%)
Other 0.2% 0.3% 0.1% 0.3% 0.3%
Total 0.1% 0.7% - 0.2% 0.7%
Key metrics
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
Performance ratios
Return on equity (1) 12.5% 7.6% 12.4% 12.6% 8.5%
Return on equity - adjusted (1,2) 14.7% 8.6% 16.8% 12.7% 9.1%
Net interest margin 2.70% 2.53% 2.73% 2.68% 2.63%
Cost:income ratio 58% 55% 62% 53% 53%
Cost:income ratio - adjusted (2) 50% 52% 48% 53% 51%
Notes:
(1) Return on equity is based on segmental operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs).
(2) Excluding restructuring costs and litigation and conduct costs.
Commercial Banking
30 June 31 March 31 December
2014 2014 2013
£bn £bn Change £bn Change
Capital and balance sheet
Loans and advances to customers (gross)
- Commercial real estate 18.8 19.0 (1%) 20.2 (7%)
- Asset and invoice finance 13.7 13.6 1% 11.7 17%
- Private sector education, health, social work,
recreational and community services 7.2 7.5 (4%) 7.9 (9%)
- Banks & financial institutions 6.9 7.3 (5%) 6.9 -
- Wholesale and retail trade repairs 5.9 6.0 (2%) 5.8 2%
- Hotels and restaurants 3.3 3.6 (8%) 3.6 (8%)
- Manufacturing 3.9 3.7 5% 3.7 5%
- Construction 2.0 2.1 (5%) 2.1 (5%)
- Other 23.4 23.4 - 23.1 1%
85.1 86.2 (1%) 85.0 -
Loan impairment provisions (1.2) (1.3) (8%) (1.5) (20%)
Net loans and advances to customers 83.9 84.9 (1%) 83.5 0%
Funded assets 88.6 89.6 (1%) 87.9 1%
Risk elements in lending 2.9 3.4 (15%) 4.3 (33%)
Provision coverage (1) 41% 37% 400bp 38% 300bp
Customer deposits (excluding repos) 88.0 87.6 - 90.7 (3%)
Loan:deposit ratio 95% 97% (200bp) 92% 300bp
Risk-weighted assets (2)
- Credit risk (non-counterparty) 56.6 57.1 (1%) 59.7 (5%)
- Operational risk 6.4 6.4 - 6.1 5%
63.0 63.5 (1%) 65.8 (4%)
Notes:
(1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(2) Risk-weighted assets at 31 December 2013 are on a Basel 2.5 basis.
Key points
During the first half of 2014, the Commercial Banking business has been reshaped to meet the needs of its customers in the
most efficient way. Complexity and costs are targeted to decline, with lower staff levels, predominantly in
non-customer-facing departments, supported by focused investment aimed at making it easier for customers to do business:
· Over 40 additional experienced relationship managers have been allocated to serve Commercial Banking customers, with a central focus on lending.
· Lending procedures are changing to speed up the process and to meet the business's commitment to make all but the most complex loan decisions within five days by the end of 2014.
· A new online loan application facility for smaller business customers was launched in February 2014, which will be extended to larger SMEs over the course of 2014.
· Two-thirds of lending decisions are now made locally.
· 60% of Relationship Managers have now completed an accreditation programme.
Commercial Banking
Key points (continued)
Whilst these changes and investments are being made, Commercial Banking continued to focus on delivering for its
customers:
· An additional 5,000 customers have received proactive 'Statements of Appetite', bringing the total to over 17,000. Over £7 billion of new or additional funding has now been offered.
· The number of complaints from SME customers fell by 7.5% compared to last year.
· A positive trend in the Net Promoter Score has been achieved over the last 12 months.
· For the sixth consecutive year, Lombard received the Business Moneyfacts award for 'Best Leasing & Asset Finance Provider'.
H1 2014 compared with H1 2013
· Operating profit increased to £635 million delivering a return on equity of 12.5% with lower impairments and higher income more than offsetting increased charges for restructuring, litigation and conduct costs (£58 million). Excluding these costs, adjusted operating profit increased by £280 million and adjusted return on equity was 14.7%.
· Net interest income increased by 7% reflecting re-pricing activity, partially offset by reduced yields on current accounts due to the continued low rate environment.
· Non-interest income decreased by 7% from lower other income (£56 million), including fees and disposal gains (£27 million), a decline in CIB (Markets) revenue share income (£17 million) partially offset by lower costs arising from closing out interest rate hedging products associated with impaired loans (£30 million).
· Total expenses increased by £48 million from higher restructuring and conduct related costs (£58 million), including interest rate swap redress, up £25 million, partially offset by direct costs down £10 million as cost saving initiatives start to take effect.
· Impairments were down £251 million reflecting fewer individual cases across the portfolio, primarily in mid to large corporate and latentprovision releases of £58 million, as credit conditions improved in Q2 2014.
· The loan:deposit ratio increased by 200 basis points to 95%, primarily a result of reduced deposits, down 3%, reflecting the rebalancing of the Bank's liquidity position.
· Risk-weighted assets were £2.8 billion lower reflecting the net movement of transfers to RCR and from Non-Core, effective from 1 January 2014.
Q2 2014 compared with Q1 2014
· Operating profit declined by 2% as increased income and lower impairments were more than offset by higher restructuring, litigation and conduct costs. Excluding these costs, adjusted operating profit increased by £103 million.
· Net interest income increased by 5% from margin expansion on deposits and the benefit of an additional day in the quarter.
· Non-interest income increased by 2% primarily from improved transaction services income £7 million, with stable income from asset finance, CIB revenue share and other lending fees.
· Total expenses, up 21%, were impacted by £61 million of restructuring costs in the quarter, as the business aligns itself to better support its customers, and included a £50 million charge for interest rate swap redress. Adjusted expenses, excluding restructuring and litigation and conduct costs, decreased by 6% due to operational cost saving initiatives.
Commercial Banking
Key points (continued)
Q2 2014 compared with Q1 2014 (continued)
· Impairments declined by £49 million primarily from a release of latent provisions of £58 million as credit conditions improved.
· The loan:deposit ratio declined by 200 basis points from a 1% decline in asset volumes, most of which was in the mid to large corporate business.
· Risk-weighted assets decreased by 1% primarily due to balance sheet movements.
Q2 2014 compared with Q2 2013
· Operating profit improved by £85 million, driven by lower impairments partially offset by higher restructuring, litigation and conduct charges.
· Net interest income increased by 6% in line with the half year trends noted above. Improved margins from re-pricing activity offset lower yields due to the continued low interest rate environment.
· Non-interest income decreased by 12% from lower CIB (Markets) revenue share and gains from equity disposals partially offset by the reduced close out charges on interest rate hedging products as noted above.
· Total expenses were up reflecting increased restructuring, litigation and conduct costs in Q2 2014, which were partially offset by lower direct and indirect costs.
· Impairments decreased by £164 million reflecting fewer significant individual cases and the latent provisions release in Q2 2014.
Private Banking
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
£m £m £m £m £m
Income statement
Net interest income 344 317 174 170 159
Net fees and commissions 172 180 84 88 91
Other non-interest income 29 34 14 15 19
Non-interest income 201 214 98 103 110
Total income 545 531 272 273 269
Direct expenses
- staff (159) (173) (79) (80) (88)
- other (33) (30) (15) (18) (17)
Indirect expenses (205) (228) (104) (101) (112)
Restructuring costs
- direct (2) (1) (2) - (1)
- indirect (1) (4) (1) - (2)
Operating expenses (400) (436) (201) (199) (220)
Profit before impairment losses 145 95 71 74 49
Impairment (losses)/recoveries - (7) (1) 1 (2)
Operating profit 145 88 70 75 47
Operating profit - adjusted (1) 148 93 73 75 50
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
£m £m £m £m £m
Analysis of income by business
Investments 90 97 45 45 49
Banking 455 434 227 228 220
Total income 545 531 272 273 269
Key metrics
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
Performance ratios
Return on equity (2) 15.0% 8.9% 14.5% 15.3% 9.4%
Return on equity - adjusted (1,2) 15.3% 9.4% 15.1% 15.3% 10.0%
Net interest margin 3.72% 3.33% 3.73% 3.70% 3.34%
Cost:income ratio 73% 82% 74% 73% 82%
Cost:income ratio - adjusted (1) 73% 81% 73% 73% 81%
Notes:
(1) Excluding restructuring costs and litigation and conduct costs.
(2) Return on equity is based on segmental operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs).
Private Banking
30 June 31 March 31 December
2014 2014 2013
£bn £bn Change £bn Change
Capital and balance sheet
Loans and advances to customers (gross)
- personal 5.5 5.5 - 5.5 -
- mortgages 8.7 8.7 - 8.7 -
- other 2.4 2.6 (8%) 2.6 (8%)
16.6 16.8 (1%) 16.8 (1%)
Loan impairment provisions (0.1) (0.1) - (0.1) -
Net loans and advances to customers 16.5 16.7 (1%) 16.7 (1%)
Funded assets 20.8 21.1 (1%) 21.0 (1%)
Assets under management 28.7 28.5 1% 29.7 (3%)
Risk elements in lending 0.2 0.3 (33%) 0.3 (33%)
Provision coverage (1) 39% 45% (600bp) 43% (400bp)
Customer deposits (excluding repos) 35.9 36.6 (2%) 37.2 (3%)
Loan:deposit ratio 46% 45% 100bp 45% 100bp
Risk-weighted assets (2)
- Credit risk
- non-counterparty 9.7 10.1 (4%) 10.0 (3%)
- counterparty 0.1 - - - -
- Market risk 0.1 - - 0.1 -
- Operational risk 1.9 1.9 - 1.9 -
11.8 12.0 (2%) 12.0 (2%)
Notes:
(1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(2) Risk-weighted assets at 31 December 2013 are on a Basel 2.5 basis.
Key points
The Private Banking business continues to invest in expanding its product offering in response to client demand for global,
integrated solutions. Enhancements in the first half of 2014 included the introduction of an around-the-clock weekday
dealing capability for foreign exchange products, serving Coutts's UK and international client-base.
We are currently reviewing our strategy, focusing on options for our non-UK related activities. The review is expected to
complete later in the year.
In the UK, further refinements to Coutts's Retail Distribution Review compliant advice framework have improved efficiency,
with total assets under advice now standing at £4.5 billion.
Private Banking
Key points (continued)
H1 2014 compared with H1 2013
· Operating profit was £145 million for the first half of 2014, delivering a return on equity of 15.0%. Excluding restructuring costs, adjusted operating profit increased by £55 million and the adjusted return on equity was 15.3%, driven by improved income, lower expenses and lower impairments.
· Total income was £14 million, or 3%, higher. Net interest income increased by £27 million due to a combination of improved deposit margins following a re-pricing exercise in the UK and lower treasury charges. Non-interest income declined by £13 million reflecting the impact of adverse foreign exchange movements and lower transactional activity in the international business.
· Total expenses declined by 8% to £400 million. Adjusted expenses were down £34 million, 8%, at £397 million reflecting savings from the streamlining of the property footprint, favourable foreign exchange movements, reduced headcount and the continued management of discretionary costs.
· Impairment charges declined by £7 million as a result of fewer specific impairments.
· Client assets and liabilities were 7% lower than the previous year, with the decrease in assets under management driven by low margin custody asset outflows, adverse foreign exchange movements, portfolio exits and reduced balances in the UK. Deposits were £3.0 billion lower, largely as a result of re-pricing action in the UK. Lending declined by £0.5 billion as repayments outstripped new lending in the latter part of 2013.
Q2 2014 compared with Q1 2014
· Operating profit was £70 million for the quarter, £5 million lower, largely as a result of a small increase in impairments and expenses, with income broadly flat.
· Total expenses were up £2 million, wholly as a result of increased restructuring costs.
· Client assets and liabilities were 1% lower than the prior quarter, wholly driven by a £0.7 billion reduction in deposits following the UK re-pricing exercise and outflows in the international business. Assets under management increased by £0.2 billion due to positive market movements. Lending remained broadly flat.
Q2 2014 compared with Q2 2013
· Operating profit increased by £23 million benefitting from higher income, lower costs and lower impairments.
· Total income was £3 million, 1%, higher. Net interest income rose by £15 million due to improved deposit margins following a re-pricing exercise in the UK and lower treasury charges. Non-interest income declined by £12 million largely as a result of adverse foreign exchange movements and lower transactional activity in the international business.
· Total expenses declined by £19 million reflecting savings from the streamlining of the property footprint, reduced headcount, beneficial foreign exchange movements and the continued tight management of discretionary costs.
Corporate & Institutional Banking
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2014 2013 2014 2014 2013
£m £m £m £m £m
Income statement
Net interest income from banking activities 365 314 186 179 142
Net fees and commissions 490 556 247 243 275
Income from trading activities 1,482 1,753 597 885 787
Other operating income 90 85 46 44 32
Non-interest income 2,062 2,394 890 1,172 1,094
Total income 2,427 2,708 1,076 1,351 1,236
Direct expenses
- staff (488) (580) (216) (272) (247)
- other (260) (284) (147) (113) (154)
Indirect expenses (1,169) (1,325) (581) (588) (657)
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