TEXT-Fitch: RBS results in line with expectations, no rating impact
Aug 6 - Fitch Ratings says that The Royal Bank of Scotland Group plc's (RBSG) Q2 performance was generally in line with the agency's expectations. The latest results have no rating implications. RBSG's Q212 results continue to reflect the impact of its balance sheet restructuring, which involves the reduction of non-core assets and re-shaping the balance sheet. The bank reduced its non-core funded assets by another GBP11bn compared to Q1 to GBP72bn at the end of Q2. In line with its strategy, the group also continued to build up liquidity and to reduce its reliance on short-term wholesale funding. Fitch views the group's restructuring/deleveraging plan as largely achievable but reducing the remaining non-core portfolio to GBP60bn-GBP65bn by year-end in line with targets, remains pivotal. The risks associated with the plan are not negligible, given that the remaining positions are less liquid and more concentrated, particularly the commercial real estate portfolio of Ulster Bank in Ireland. Furthermore, the timing of further deleveraging remains dependent on market conditions, during general macroeconomic and market uncertainty and the continuing eurozone crisis. RBSG reported group operating profit of GBP1.8bn in H112 (of which GBP650m was generated in Q212), slightly less than the same period last year. Like its peers, the group was affected by low client activity in the weak capital market environment. The Markets division reported Q212 operating profit of GBP251m, down from GBP824m in Q112 and GBP327m in Q211. Although the income generated from markets and investment banking is expected to fall over time, in line with the announced re-organisation, earnings volatility will also reduce over time, which Fitch views positively. Core performance in other business divisions held up well, despite the de-risking and de-leveraging process, the build-up of liquidity, the generally weak demand for credit and uncertainties in the eurozone, particularly in Ireland and Spain. Weaker income generation was partially offset by the bank's cost saving programme and broadly stable loan impairment charges compared to Q112. Loan impairment charges were 41% lower than for Q211, principally reflecting substantial provisioning at Ulster undertaken in Q211. Expenses in Q212 included GBP125m provisions for expected costs in relation to a technological failure in June 2012 as well as a GBP50m provision against possible interest rate hedging products. Fitch expects both of these provisions to be supplemented over the coming quarters. Slightly lower core operating results were partially offset by lower operating losses in its non-core business (H112: loss of GBP1.35bn compared to a loss of GBP1.96bn in H111) thus softening the fall in group operating profits year on year. Net results were affected by significant non-operating and exceptional items which turned RBSG's operating profits for H112 into net losses. Fair-value changes to own debt and the impact of the derivatives against the Asset Protection Scheme caused significant income volatility. The negative adjustment to its own credit spread in H112 reached almost GBP3bn compared to GBP236m in H111. However, both these changes are non-cash, normally reversible, and treated as non-operating items by Fitch. RBSG strengthened its provision against PPI claims by a further GBP135m in Q212, after booking GBP125m in Q112 and GBP850m in 2011. RBS's core Tier 1 capital ratio improved by 30 basis points quarter-over-quarter to 11.1% at end-June 2012. However, in light of its credit exposures, Fitch, deems the group's capitalisation to be just adequate for its rating level. Fitch believes that a return to sustainable profitability and internal capital generation would be necessary for RBSG to be in a position to respond to ever increasing regulatory capital requirements, particularly from growth in its core retail and commercial business, incremental CRD IV capital requirements, and potential industry wide requirements from the FSA. Additional information is available on www.fitchratings.com.
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