Royal Bank Of Scotland Share News (RBS)

Mon, 6th Aug 2012 16:25

(The following statement was released by the rating agency)

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.



(New York Ratings Team)

(e-mail: pam.niimi@reuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;)

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