Royal Bank of Scotland (RBS) reported improved core banking results relative to last year. Its operating profit for the third quarter was £255 million, compared with last year's loss of £14 million. RBS' net income for the quarter came in at a loss of £469 million, versus profit of £940 million, although last year's results were bolstered by a £1.2 billion gain on the sale of its Citizens Bank stake.
There were several large charges in the quarter totalling £1.1 billion, including £469 million of restructuring costs, £429 million in litigation, and £300 million in deferred tax asset impairment. Following the prior quarter's £450 million payment protection insurance provisions, RBS made no further PPI provisions in this quarter.
While quarterly results show some improvement in the core business, we believe the bank is not out of the woods yet; its restructuring and misconduct charges will continue to pressure the bottom line, as well as posing downside risk to overall capitalisation. We're maintaining our fair value estimate of £2.75 per share
Higher Operating Profit than Last Year
Looking at Royal Bank of Scotland’s business segments, its personal and business banking, commercial banking, private banking, investment banking, and international business lines all posted higher operating revenue than in the year-ago quarter. Following the restructuring of Williams & Glyn and after incurring nearly £1.5 billion in divestment costs, the bank now states that the business will not be sold by year-end 2017.
RBS is in discussion with HM Treasury, and expects further engagement with the European Commission, to settle on a solution for its bailout obligations. The divestiture of the unit must be completed before the end of 2017 to satisfy conditions for the £45 billion bailout.
Royal Bank of Scotland is a dominant U.K. bank and has made considerable progress on its transformation, in our opinion. RBS destroyed its narrow economic moat with its global ambitions and reckless acquisition of ABN AMRO at the peak of the market bubble in 2007. RBS received £45 billion in U.K. government bailouts but has since lost it all, and then some, on dodgy assets and misconduct. But while the road ahead is increasingly clear, we expect it to be a bumpy ride.