RBS Splashes More Red Ink as Euro Woes Continue

| About: The Royal (RBS)

RBS Group (NYSE:RBS) earnings last week revealed another tough period for the 84% state-owned banking group that were largely in line with what we had suggested in our article titled RBS Earnings Preview: Profits May Remain Elusive. The 20% decline in the company’s overall operating profit over Q1 2011 was only accentuated by the costs it incurred over the period owing to the Payment Protection Insurance reimbursement charges and the sovereign debt write-offs. The RBS Group competes with other worldwide banking institutions and financial services groups like Citigroup (NYSE:C), Barclays (NYSE:BCS), Bank of America (NYSE:BAC), UBS (NYSE:UBS) and JPMorgan Chase (NYSE:JPM).

We maintain our $13.40 price estimate for RBS’ stock that is a significant premium to its market price of below $8 as we believe the current price reflects the sentiments of a market which is reacting heavily to the growing uncertainty of the European debt situation.

Global Banking & Markets Results Tumbled

The group’s Global Banking & Markets division represents its investment banking and sales & trading operations. The division reported operating income of £446 million ($720 million) for Q2, which is just about 40% of the £1,098 million ($1,770 million) achieved in Q1 2011.

We can attribute most of this decline to the group’s fixed income & currencies trading operations, which roped in £987 million ($1.6 billion) in income in the quarter compared to the £1.7 billion ($2.8 billion) earned over the previous quarter.

(Chart created by using Trefis' app)

And the Charges Grew

RBS’ struggle with its operations in Ireland through its Ulster Bank division continued through this quarter as the group took impairment losses of £269 million ($435 million) in the quarter.

(Chart created by using Trefis' app)

The bank also set aside £850 million ($1,375 million) to settle the claims expected to arise due to the PPIs mis-selling. You can read more about this in our article RBS Likely to Take a Hit in PPI Battle.

And to add to this, the bank wrote-off £733 million ($1,180 million) due to loss of value in its securities portfolio comprising of a substantial amount of European sovereign bonds. With the exact impact of the European debt crisis on the bank unclear due to the highly volatile situation in the region, this could continue to be a source of pain for the group for the rest of the year.

See our complete analysis for RBS

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Tagged: , Money Center Banks, Earnings, United Kingdom
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