In first-half 2017, Royal Bank of Scotland (RBS) posted its first semiannual profit since 2014. Net income amounted to £939 million, versus a loss of £2.1 billion in the year-ago period. Core revenue generation increased decently for the year to date to £6.9 billion, a 14% increase versus last year, mainly driven by trading income and a 3% increase in net interest income, while net fee generation was weak and declined 5% year over year.
As well as reporting that it is back in profit after three years of losses, RBS hinted that it may move its NatWest Markets arm to the Netherlands, stating “NatWest Markets has reviewed ways to minimise disruption to the business and continue to serve its customers well in the event of any loss of EU passporting. Should the outcome of the current EU separation negotiations make it necessary, NatWest Markets is ensuring our existing RBS N.V. banking licence in the Netherlands is operationally ready”.
Elsewhere in the results, RBS states that it is subject to political risks, including economic, regulatory and political uncertainty arising from the vote to leave in the referendum on the UK's membership of the European Union.
“Changes to the prudential regulatory framework for banks and investment banks within the EU may require additional structural changes to the Group's operations, including if the Group is no longer able to rely on the passporting framework for financial services applicable in the EU”.
Fair Value Estimate for Shares on Hold
While the bank has posted some improvement in its core lines, we are maintaining our fair value estimate of £2.65 per share and our no-moat rating, considering ongoing restructuring and the downside risk of outstanding litigation and conduct issues, with the biggest being the cases related to U.S. residential mortgage-backed securities and the U.S. Department of Justice.
On a reported basis, with an 18% decline in the year to date compared with last year, costs are trending below our estimate; however, considering the ongoing restructuring, we will maintain our estimate for now. The total cost of £4.9 billion was £1.1 billion lower than first-half 2016, mainly reflecting a £919 million reduction in litigation and conduct costs and a £318 million reduction in adjusted operating expenses.
Within the cost lines, staff costs stood at £2 billion, indicating a decline of 12.4% versus first-half 2016, underpinned by a 14,200 reduction in headcount. With regard to litigation and conduct charges, the bank has so far resolved the issues relating to the 2008 rights issue and has agreed a settlement with the Federal Housing Finance Agency.
As it stands, RBS’ common equity Tier 1 ratio of 14.8% demonstrates improvement of 140 basis points compared with year-end 2016. Much of the improvement came from profit generation and the reduction in risk-weighted assets in the noncore business segment, which is due to be closed at the end of the year. As of the first half, the common equity Tier 1 ratio is above the management-targeted 13%.
At £116 million, loan-loss provisions amounted to more than 70% lower than last year, as well as trending below our £629 million full-year estimate. The lower impairment charges were mainly driven by net impairment release of £78 million in the capital resolution segment, compared with a loss of £263 million last year.
