Interim Management Statement

RNS Number : 5056L

Royal Bank of Scotland Group PLC

07 May 2010

 

Highlights

The Royal Bank of Scotland Group reports a first quarter operating profit⁽¹⁾ of £713 million, compared with a loss of £1,353 million in the fourth quarter of 2009

Core business operating profit of £2,272 million

First quarter operating performance benefited from rising NIM, favourable credit trends and strong seasonal performance in Global Banking & Markets

Continued good progress against the key metrics in our five year strategy

Key points

·	First quarter net attributable loss improved to £248 million from a loss of £765 million in the fourth quarter of 2009.
·	First quarter operating profit(1) improved to £713 million compared with a loss of £1,353 million in the fourth quarter. After restructuring and other non-operating costs, and £500 million related to the Asset Protection Scheme, the Group recorded a loss before tax of £21 million compared with a profit of £134 million in the fourth quarter of 2009.
·	Operating profit before impairment losses, adjusted for fair value of own debt, improved to £3,557 million from £1,476 million in the fourth quarter of 2009.
·	Core bank operating profit improved to £2,272 million, compared with £1,183 million in the fourth quarter, led by seasonally strong trading results in Global Banking & Markets (GBM).
·	Net interest margin was 1.92%, up 9 basis points on the fourth quarter, led by increases in GBM and Non-Core.
·	Total Group impairments fell from £3,099 million in the fourth quarter of 2009 to £2,675 million in the first quarter of 2010, reflecting continued underlying improvement in the global economy.
·	Risk-weighted assets increased by 5% to £461 billion, principally as a result of the roll-off of ABN AMRO capital relief trades, as previously guided, along with the weakening of sterling.
·	Core Tier 1 capital ratio of 10.6% compared with 11.0% at 31 December 2009.
·	Deposit growth of £11 billion and the Non-Core run-off helped drive an improvement in the Group loan to deposit ratio to 131% from 135% in the fourth quarter of 2009. Core loan to deposit ratio improved further to 102%.
·	Continued good progress has been made against published key metrics in our Strategic Plan implementation.
·	Customer franchises remain strong: exemplified by UK Retail, which now serves over 12.8 million current account customers and continued to grow its mortgage market share.

Note:

(1)

Profit/(loss) before tax, purchased intangibles amortisation, integration and restructuring costs, strategic disposals, bonus tax, Asset Protection Scheme credit default swap, gains on pensions curtailment, write-down of goodwill and other intangible assets and RFS Holdings minority interest. Statutory operating loss before tax of £5 million.

Key financial data

	Quarter ended
	31 March   2010	31 December  2009	31 March   2009
	£m	£m	£m
Core
Total income (1)	8,020	7,432	10,446
Operating expenses (2)	(3,774)	(3,788)	(3,968)
Insurance net claims	(1,003)	(1,173)	(789)
Operating profit before impairment losses	3,243	2,471	5,689
Impairment losses	(971)	(1,288)	(1,030)
Core operating profit (3)	2,272	1,183	4,659
Non-Core operating loss (3)	(1,559)	(2,536)	(4,480)
Group operating profit/(loss) (3)	713	(1,353)	179
Group operating (loss)/profit before tax (4)	(21)	134	(44)
Loss attributable to ordinary and B shareholders	(248)	(765)	(902)

	31 March  2010		31 December   2009	Change
Capital and balance sheet
Total assets	£1,582.9bn		£1,522.5bn	4%
Funded balance sheet (5)	£1,120.6bn		£1,084.3bn	3%
Loan:deposit ratio (Group - net of provisions)	131%		135%	(400bp)
Core Tier 1 ratio	10.6%		11.0%	(40bp)
Net tangible equity per ordinary and B share	51.5p		51.3p	-

Notes:

(1)	Excluding changes in the fair value of Asset Protection Scheme credit default swap and strategic disposals.
(2)	Excluding purchased intangibles amortisation, integration and restructuring costs, bonus tax, gains on pensions curtailment and write-down of goodwill and other intangible assets.
(3)	Operating profit/(loss) before tax, purchased intangibles amortisation, integration and restructuring costs, strategic disposals, bonus tax, Asset Protection Scheme credit default swap - fair value changes, gains on pensions curtailment and write-down of goodwill and other intangible assets.
(4)	Excluding write-down of goodwill and other intangible assets.
(5)	Funded balance sheet is defined as total assets less derivatives.

Comment

Stephen Hester, Group Chief Executive, commented:

"Last year we began implementing one of the most significant corporate restructurings ever undertaken.  We said the Plan would take five years to implement.  We set out transparently where the milestones would be along the way.  And we explained how, if implemented properly, the Plan would turn RBS from a problem into an opportunity for all our constituencies. 

Today we show that we remain on track for the delivery of the Plan - we are doing what we said we would do.  We have made good progress but there is still significant work to be done.  I welcome the market's recognition of our progress to date, but the challenges we still face are real and should not be underestimated.

The year has begun for RBS broadly as we had expected. Economic recovery is benefiting our customers and thereby ourselves.  However, we remain conscious of the economic imbalances still to be tackled globally and of the risk of specific events (such as those affecting Greece), with the associated danger of contagion. Certain sectors, like real estate, also face a longer term work-out and there are ongoing losses for banks to absorb. At present, global recovery is helping impairments fall a little faster than we expected, though lumpy events may well interrupt that trend. Our medium-term targets already factor in a normalisation of credit conditions.

RBS's Retail and Commercial businesses are beginning to recover and should drive our growth over the next few years.  While we have taken decisive management actions to improve these businesses, the pace of recovery will also be affected by the rate at which credit conditions change and when interest rates return to more normal levels, giving some relief to liability margins. 

Global Banking & Markets, our investment bank, is on track with a seasonally strong first quarter, though significantly below the unusual conditions of a year previously.  GBM was radically restructured 15 months ago and is the area with greatest people retention challenges, so we are pleased with progress in this important Division.

RBS's risk profile continues to recover. We made huge balance sheet, capital and liquidity improvements in 2009 and these are now being extended through steady progress, in-line with targets, in Non-Core run-off and disposals. We are substantially improving the internal fabric and machinery of risk management.  While not likely to be called upon, we also retain the valuable fallback protection of the Asset Protection Scheme and related contingent capital.

We aspire to be focused and purposeful in pursuit of RBS's three principal goals:

o  to serve Customers well;

o  to restore the Bank to undoubted standalone strength; and

o  to rebuild sustainable value for all Shareholders and in so doing to enable the UK Government to sell its shareholding profitably over time.

Comment (continued)

The first of these goals anchors all our efforts. We have renewed our focus on our Customers and how we serve them, and are investing in our businesses to improve service further. Our Customer franchises are solid and responding to these efforts though it will take time to raise customer service to the levels we aspire to.

We have already made significant progress in restoring the Bank to standalone strength through improvements in our risk profile and management culture. The job of rebuilding sustainable Shareholder value will take longer, and quarterly progress may not always be smooth. Volatility - of markets, of internal and external sentiment and outlook - is a fact of life.  We will continue to try to steer a measured and determined course, rebuilding a reputation for delivery and with it the support of our people which is needed to bring about that delivery.  Along the way, we are determined to support those who have supported us: to deliver for Customers, for the Communities we serve and for our Shareholders both public and private.

As covered more fully in my 2009 year-end statement, the regulatory landscape remains an area of focus, with a wide range of outcomes still under debate. The impact on economies as a whole, on banks in general and on RBS specifically is still uncertain. RBS welcomes and embraces change and reform and is actively participating to help governments and regulators calibrate measures, understand their consequences and consider timing.  Shareholders and all our stakeholders need to be cautious as these issues, along with new taxes and other measures, are debated and progressed.

So, as 2010 unfolds we remain optimistic for RBS and the prospects of achieving the Plans laid out and our vision to restore RBS to an admired and high performing institution.  Progress to date should give encouragement, but there is no complacency within RBS as we continue the work across our businesses."

Highlights

First quarter pro forma results summary

Current trading

Operating performance in the first quarter of 2010 improved, with The Royal Bank of Scotland Group ('RBS' or the 'Group') recording a quarterly operating profit. Total income rose to £8,954 million, up 19% from the fourth quarter of 2009, while expenses fell 1% to £4,430 million and insurance claims were 14% lower at £1,136 million. Impairments fell 14% to £2,675 million, leaving a Group operating profit of £713 million, compared with a loss of £1,353 million in the fourth quarter. Cost savings programmes remain on track.

After integration and restructuring costs and other items, including a £500 million charge related to the Asset Protection Scheme, RBS reported a pre-tax loss of £21 million. Net of tax, goodwill and intangible write-downs, minority interests and preference share dividends, the loss attributable to ordinary shareholders was £248 million, compared with a loss of £765 million in the fourth quarter of 2009.

In the Core bank, operating profit was £2,272 million, 92% higher than in the fourth quarter of 2009. The result was driven by a seasonally strong trading performance in Global Banking & Markets, where income rose 35%, benefiting from market conditions that, although less buoyant than the exceptional environment experienced in the first quarter of 2009, were still favourable; credit markets performance was particularly good.

In the Core retail and commercial businesses, income continued to be affected by generally low business volumes and by depressed liability margins, offsetting the repricing of new business asset margins. Adjusted for the number of days in the quarter, core retail and commercial net interest margin was stable.  Customer franchises remained resilient, with good progress particularly in UK mortgages and current accounts.

Core return on equity in the quarter was 15%, in line with the longer term targets and driven by seasonally strong GBM results. However, significant quarterly movement in returns is to be anticipated, and future capital and other regulatory requirements could materially affect future returns.

Non-Core operating losses were substantially lower at £1,559 million, with income rising to £934 million.

Good progress has been made on restructuring and divestments. The divestments of a UK retail and business banking operation and of the Group's card payment acquiring business are currently on track.

Legal separation of ABN AMRO Bank NV took place on 1 April 2010. As a result RBS will no longer consolidate the interests in ABN AMRO of its consortium partners, the Dutch state and Banco Santander, in its results from the second quarter of 2010 onwards.

Highlights (continued)

First quarter pro forma results summary (continued)

Efficiency

Group operating expenses fell by 1%, driven principally by Business Services, where costs declined by £129 million with reductions in property, technology and operations costs. The Group cost:income ratio, adjusted for insurance claims, improved to 57% from 72% in the fourth quarter of 2009.

The Group's programme to reduce costs is already well advanced and we are beginning to see the necessary efficiency benefits of this. Over £2 billion in annualised cost savings have so far been achieved, compared with a commitment to deliver at least £2.5 billion in cost reductions by 2011.

Regrettably, but inevitably, this has resulted in job losses and while the most substantial reductions have been completed there are more to come. The Group will continue to work hard alongside staff and their representatives to minimise the human impact of this.

Impairments

Impairment losses declined in the first quarter to £2,675 million compared with £3,099 million in the fourth quarter of 2009. On an annualised basis impairments represented 1.8% of loans and advances, compared with 2.1% in Q4 2009, and provision coverage increased to 45% of risk elements in lending and potential problem loans, compared with 42% in the fourth quarter of 2009. Impairment trends were favourable, particularly in the Core UK retail and US retail and commercial businesses, providing support for the view that impairments are likely to have peaked in 2009.

Non-Core impairments fell by 6% to £1,704 million. Improving credit trends continued in several segments of the division's portfolio, although the overall impairment level remains elevated and volatility in impairment charges remains likely.

Balance sheet management

Third party assets increased by 3% during the first quarter to £1,121 billion, with around half of the increase accounted for by exchange rate movements, as the weakness of sterling increased the value of foreign currency-denominated assets. The increase also reflected seasonal movements in GBM assets, which rose after falling sharply in the fourth quarter but remain within the division's targeted range, and a modest increase in retail and commercial lending, offset by Non-Core run-off.

The Group has continued to improve its funding profile, with successful deposit-gathering initiatives particularly in UK Corporate and Global Transaction Services driving a reduction in the Group's loan to deposit ratio to 131%, with the Core bank loan to deposit ratio at 102%. Wholesale unsecured funding of less than one year's duration totalled £222 billion at 31 March 2010 (including £94 billion of deposits from banks), compared with £249 billion at the end of 2009, including £110 billion of deposits from banks. The continuing run-off of the Non-Core portfolio is expected to significantly reduce future wholesale funding requirements.

Highlights (continued)

First quarter pro forma results summary (continued)

Balance sheet management (continued)

Liquidity reserves totalled £165 billion, down £6 billion from 31 December 2009 but still above the Group's long term target band, including a central government bond portfolio of £59 billion.

Capital

Risk-weighted assets increased by £23 billion to £461 billion, more rapidly than nominal assets, primarily reflecting the roll-off of capital relief trades in the old ABN AMRO portfolios in line with guidance provided earlier this year. This increase in RWAs drove a reduction in the Group's Core Tier 1 ratio to 10.6% at 31 March 2010, compared with 11.0% at 31 December 2009. The recently completed exchange and tender offers are expected to increase the Core Tier 1 ratio by approximately 30 basis points.

Tangible net asset value per share increased by 0.2p to 51.5p reflecting other comprehensive income of £986 million during the quarter, primarily currency gains and available-for-sale valuation adjustments, offset partially by the narrow loss during the period.

Good progress has been made on restructuring and divestments. The divestments of a UK retail and business banking operation and of the Group's card payment acquiring business are currently on track.

Customers

The Group's customer franchises have remained resilient. RBS has sustained its position in its core retail and corporate markets, with customer numbers steady or growing across most of the Group's major businesses.

UK Retail maintained good growth in the current account market and now serves over 12.8 million current account customers. Progress has also continued in the mortgage market, with the division achieving a 10.6% market share of new lending in the first quarter, compared with a 7% share of the mortgage stock. Net mortgage lending in the first quarter totalled £2.0 billion.

Good progress in the current account market was also achieved by other divisions, with Ulster Bank adding 9,000 current account customers during the quarter and the US retail and commercial division expanding its consumer checking account base by 44,000 since the first quarter of 2009.

The Group has kept up its efforts to make credit available to UK businesses. Over £10 billion of new facilities were extended to businesses and corporates during the first quarter, with activity picking up in March after a seasonal lull in January and February.

Highlights (continued)

First quarter pro forma results summary (continued)

Outlook

The economic outlook has stabilised and continues to improve steadily. However, substantial risks remain from the unwinding of structural imbalances globally and the impact of the withdrawal of fiscal and monetary support. The timing and make-up of regulatory and fiscal responses to the crisis also remains uncertain. However, the Group currently remains on track to deliver its five year plan.

Operating performance in the second quarter is expected to reflect GBM income returning to more normal levels from the seasonally strong first quarter performance, but steady progress in Core retail and commercial divisions. 

Group net interest margin is expected to gradually improve over the remainder of 2010, with the recovery from the unsustainably low margins experienced in 2009 driven by the Core retail and commercial divisions. Impairment trends have turned more favourable in a number of areas, but levels of impairment are likely to remain high and there may be volatility in impairment losses, particularly in the Non-Core portfolio.  

Contacts

For analyst enquiries:
Richard O'Connor	Head of Investor Relations	[phone]
For media enquiries:
Group Media Centre		[phone]

Analysts' conference call

The Royal Bank of Scotland Group (RBS) will be hosting a conference call and live audio webcast following the release of the results for the quarter ended 31 March 2010. The details are as follows:

Date:		Friday 7 May 2010
Time:		08.15am UK Time
Webcast:		www.rbs.com/ir
Dial in details:		International - [phone] UK Free Call - 0800 694 8082 US Toll Free - 1 866 966 8024

Background slides, which will not be formally presented to, will be available on the Group's website www.rbs.com/ir ahead of the conference call.

 

END

 

 

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