The Royal Bank of Scotland contained its first-quarter losses to £857 million ($1.3 billion) courtesy of a strong showing in global banking and markets, but the bank cautions that times remain tough. It also said that the plan to sell its retail and commercial banking business in Asia is progressing, albeit slowly.
RBS's total income rose to £9.7 billion, up 26% on the same quarter of 2008, which the bank said reflected a strong performance for global banking and markets (GBM) across divisions, with rates, currencies and commodities particularly buoyant. RBS noted that it had moved to the number four position globally in Euromoney's foreign exchange poll, from number five earlier.
However, impairments on reclassified assets more than quadrupled to £2.8 billion, compared to £696 million in the first quarter of 2008, and drove RBS to the first-quarter loss of £857 million, which compared to a profit of £245 million in the first quarter of 2008.
"The results demonstrate the challenging conditions we face and that we expect to continue," group chief executive Stephen Hester said in a written statement. "Our core customer franchises are facing the reality of a sharp recession following a year in which the credit markets crisis caused our worst ever performance."
Hester said the first-quarter results reflected the buoyancy of financial markets revenues within GBM, which he termed encouraging, coupled with the negative impact of lower interest rates and economic recession on the bank's net interest margins and impairment losses, which have been building since last year across all businesses and sectors.
The tone of the earnings release was generally cautionary with Hester saying he expected credit conditions to continue to deteriorate. He also predicted a slow-down in financial market activity compared to what he termed "the very buoyant conditions" seen in the first quarter. Hester added that despite the economic recovery which was beginning to be talked about, RBS was managing its businesses expecting both 2009 and 2010 to be difficult years for the bank.
Hester said progress has been made towards positioning divisions to achieve a return on equity of 15% or above; and towards achieving a balanced funding and liquidity profile as well as a risk appetite consistent with the bank's resources and its customer franchises, as earlier stated. RBS has set a target of saving £2.5 billion in costs over the next three years, of which initiatives totalling £312 million have been actioned.
RBS has also made some progress with regard to disposals, with the liquidation of its Bank of China stake in January for $2.4 billion, followed by the sale of its 50% stake in Linea Directa to Bankinter for €426 million ($571 million) in April.
News had already filtered into the market that the sale of its Asian retail and commercial businesses, on which RBS is advised by Morgan Stanley, is proceeding more slowly than initially forecast and that no substantial announcement in this respect would be forthcoming with the first-quarter results.
Hester said the interest in the Asia businesses thus far had been encouraging but "the pace of asset reduction will be slowed by the duty to protect shareholder value until markets normalise". When RBS first announced the sale earlier this year, specialists had expected that the bank would try to make some indications of progress along with the first-quarter results.
Specialists say the complexity of the sale in Asia, where countries such as China and India have very strong banking regulators, is the primary reason for the delay. The Asia retail network was one of the compelling add-ons for RBS's 2007 acquisition of ABN AMRO. In India, where it can take years for existing players to open new branches and obtaining licenses is a lengthy process, ABN AMRO had a 28-branch strong network. ABN AMRO's operations in Indonesia had a more than 180-year history and RBS gained a network of 20 branches in 10 cities across the five major islands of Indonesia through the acquisition. Branch networks in China and Taiwan are among other assets up for sale.
The commercial business is the small- and medium-size enterprises (SME) franchise across Asia. This is a business RBS was until recently trying to grow as it is a relatively new entrant.
On the final shortlist for the RBS Asia assets are: the Australia and New Zealand Banking Group (ANZ), which is advised by Credit Suisse; HSBC; and Standard Chartered, which is advised by Goldman Sachs and UBS. RBS is keen to sell the Asia business en masse rather than on a piecemeal basis.
Some specialists have suggested that ANZ could bid aggressively because the deal will provide it with a ready-made entry platform into a number of Asian markets. But others disagree, saying that both HSBC and Standard Chartered will be more confident of post-acquisition integration, as the acquisition will be an add-on to their existing businesses.
RBS said that in the first quarter the retail and commercial businesses in Asia "suffered from lower transactional levels on the back of poor investor sentiment". Impairments in India consumer finance were high, with recorded provisions of £44 million on a book of £1.1 billion.
One concern specialists have expressed is that the value of the franchise could be diminished by too lengthy a sale process. RBS is trying not to invest further in a business it does not intend to retain and could see a loss of business as well as customer migration if the uncertainty continues.
RBS's first-quarter earnings update follows a week of generally good results from British banks, with both Barclays and Standard Chartered beating forecasts. "Overall, while the world clearly remains very uncertain, the group has had a strong start to the year, with a record quarter in terms of both profit and income," Standard Chartered said when it released its interim management statement on May 5. All eyes are now on HSBC, which is declaring results today.
RBS's share price gained 13.9% to a close of 47.40 pence on the London Stock Exchange on Friday.