RPT-Fitch: RBSG Continues to De-risk; Costs Remain Challenging
Feb 28 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says that The Royal Bank of Scotland Group plc's (RBSG; Viability Rating 'bbb') GBP8.2bn pre-tax loss reported for 2013 mostly reflects a clean-up of the business stemming from the creation of the "bad bank", RBS Capital Resolution (RCR) and provisions against "conduct" risk. However, the new strategic plan announced with its results highlights the continued earnings pressure the group faces from restructuring costs, operational and IT inefficiencies as well as fragmented processes. Additional legal costs, fines, penalties and customer redress costs are also likely. Nonetheless, the results showed a continued de-risking of the balance sheet, with risk-weighted assets reducing by 16% (GBP75bn) during 2013 and the funded balance sheet by 15% (GBP130bn). The group's funding profile has continued to improve and Fitch considers its sound liquidity to have remained a rating strength. While we believe that the task of downsizing the RCR remains challenging, it will likely be aided by an increasingly benign economic environment and will be undertaken by a highly experienced team within RBSG. The large impairment charges of GBP8.4bn bring forward the brunt of the impairment charges the group expected over the next three years and not yet recognised in its stock of provisions. As a result, their impact on the group's fully loaded Basel III (FLB3) CET1 ratio was minimal in 4Q13, as they resulted in lower regulatory deductions. The same applies to the write-off of deferred tax assets; and of goodwill and other intangibles (altogether adding GBP1.9bn to group losses for the period). The main impact on capital in FY13 can be attributed to conduct and legal expenses, including GBP0.5bn core business redress and litigation costs, GBP0.6bn provisions against interest rate hedge redress, GBP0.9bn against PPI, and GBP2.4bn against other various regulatory and legal actions, primarily relating to mortgage-backed and other securities litigation.
The group reported a FLB3 ratio of 8.6% at year-end, compared with 9.1% at end-3Q13 but up from just 7.7% at end-2012, which is one of the lowest amongst the UK major banks. The group continues to target an end-2015 ratio of approximately 11% and more than 12% by end-2016, to be achieved mostly by way of continued deleveraging (assets sales and reductions, including the sale of Citizens in the US and of the Williams and Glynn branches in the UK). The group's Core Capital Ratio ratio reported under current rules was 10.9%. The deleveraging is also likely to result in lower revenues. In 2013 they were negatively impacted by the scaling back of Markets activity as well as of the International Banking operations, lower revenues from UK Corporates and from US Retail and Commercial. Given the group's much reduced scale in the medium term, revenues will continue to fall in absolute terms and become less diversified but also less volatile.
The net interest margin (NIM) was managed effectively during the year thanks to a managed reduction in funding costs. Overall, given its focus on lower risk business, particularly on UK residential mortgages, the NIM is likely to improve slightly but to remain subdued until interest rates rise.
Restructuring costs will remain high in the medium term as the group re-sizes and reduces businesses it no longer deems strategic. Consequently, together with conduct, regulatory and redress costs, restructuring costs and investments will continue to have a negative impact on earnings (and, dependent on timing issues, potentially on reported capital measures) in the short to medium term.
Against this background, non-performing loans (NPLs) have decreased in absolute terms, although given the overall reduction in assets they rose to account for 9.4% of total loans (end-2012: 9.1%) in 2013. They were 64% covered with impairment reserves, substantially more than in 2012, thus reducing the ratio of NPLs net of impairment allowances to FLB3 capital to 39% year-end (end-2012: 52%). Problematic exposures in Ireland are likely to remain an issue in the medium term and we see Ulster Bank remaining a drag on profitability until it is more extensively restructured.
RBSG's funding profile has also continued to improve. The proportion of stable customer deposits to customer loans has risen and reliance on wholesale funds, particularly short-term has reduced (liquid assets covered short-term wholesale funds by 4.6x). Liquidity has also remained sound, with both the net stable funding ratio and liquidity coverage ratio reported to be over 100%.
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