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RBS cutting its tethers

The bank is progressing with its restructure, but at the detriment of current profits
July 30, 2015

Times are not about to get quieter for Royal Bank of Scotland (RBS). "This will continue to be a noisy year as we go further and faster on restructuring and deal with the conduct issues of the past," chief executive Ross McEwan told journalists digesting the 199 pages that comprise the wounded banking giant's half-year results.

IC TIP: Buy at 357.1p

The number RBS would like investors to focus on is adjusted operating profit, which strips out restructuring, misconduct and litigation costs. This profit edged up from £3.36bn in the first half of 2014 to £3.45bn for the period under review. While strong mortgage demand helped the personal banking business to bounce back after a slow start to the year, the commercial banking arm upped its revenue contribution after boosting its loan book by £1.4bn year on year. The shrinking investment bank once again dragged on profits.

Unsurprisingly, however, some sizeable cost adjustments took a chunk out of RBS's statutory pre-tax profit. The bank booked litigation and conduct costs amounting to £1.3bn in the first half, and restructuring costs of £1.5bn. The bank has not yet even started settlement discussions with US authorities over the past mis-selling of mortgage-backed securities, for which RBS has already set aside hefty sums. Management says it is at the back of the queue.

But the restructure is well under way. The offloading of its US banking arm, Citizens, is going swimmingly: the value of its shares provided a £211m fair-value gain to its discontinued operations. Furthermore, RBS is set to receive proceeds of $2.5bn (£1.6bn) from the sale of a chunk of its Citizen shares to the public and back to the bank, reducing its stake to just over 20 per cent of the company. The banking group is on track to sell down its entire stake by the end of this year, a year ahead of schedule.

Challenger bank Williams & Glyn is set to be separated next summer, and the investment bank is on track to reduce its risk-weighted assets by £25bn by the end of this year. What's more, the bank has improved its tier-one capital ratio by 80 basis points in three months: it now stands at 12.3 per cent of risk-weighted assets.

Analysts at Investec Securities expect a £819m pre-tax loss for the full year, compared with a £3.2bn pre-tax profit in 2014.

ROYAL BANK OF SCOTLAND (RBS)
ORD PRICE:357.1pMARKET VALUE:£41.3bn
TOUCH:357.1-357.3p12-MONTH HIGH: 414pLOW: 326p
DIVIDEND YIELD:nilPE RATIO:nil
NET ASSET VALUE:485p 

Half-year to 30 JunPre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20142.239.9nil
20150.29-1.9nil
% change-87-119-

Ex-div: -

Payment: -