The Royal Bank of Scotland interim management statement reveals:
The Group has made tangible progress against our business and financial targets. Looking at the quarter’s highlights, Group operating profit improved by nearly half a billion pounds to £726 million, with the Core Bank’s profit improving by 10% to £1.7 billion.
Core Return on Equity (ROE) moved higher to 12%, driven by Retail & Commercial’s ROE improvement to 14%. Non-Core run down continues ahead of plan, as we reduced assets by £20 billion in the quarter, and Q3 saw significant progress on EU mandated disposals. Core Tier 1 ratio remained strong at 10.2%.
Income
Group income remained resilient in the third quarter at £7.9 billion as our Retail & Commercial businesses delivered good underlying growth, offsetting markets-related lower revenue in Global Banking & Markets (GBM). Net interest margin of 2.05% was up 2 bps, with expansion in Retail & Commercial muted by higher term funding costs.
Costs
The Group maintained good control over costs in the third quarter, with costs at constant exchange rates down 2% year-on-year. Our £2.7 billion cost saving programme continues to deliver savings which have been funding investments to strengthen our Core franchises.
Impairments
Impairments declined in the quarter to £1,953 million, down 21% quarter-onquarter and 40% year-on-year. The reduction in impairments was spread across the Group, with the most significant improvements in Retail & Commercial and GBM. Non-Core saw impairments decline for the fifth consecutive quarter, although property-related impairments remain elevated.
Balance sheet
Q3 saw further steady progress in the de-risking of the Group’s balance sheet. Non-Core managed a further run-down of £20 billion of assets, £11 billion from sales and £9 billion from run off. Non-Core’s total assets were £154 billion at the quarter end.
Funding and liquidity
The Group’s funding and liquidity position improved nicely in Q3 2010, with £18 billion of term debt issuance. Year-to-date issuance of £35 billion is well ahead of our full year £25 billion target. The Group liquidity reserve increased in the quarter to £151 billion. Loan to deposit ratio improved further to 126% (101% Core), and the Group net stable funding ratio now stands at 103%.
EU mandated disposal programme
The Group has made good progress in the third quarter with agreements signed to sell its UK branch/SME offering, the Global Merchant Services business, and the majority of the remaining Sempra JV assets.
Capital
Group Core Tier 1 ratio stands at 10.2% at 30 September 2010. Given this strong capital base we expect to be well positioned to meet future Basel requirements.
Stephen Hester, Group Chief Executive, commented:
“Our third quarter results demonstrate that we continue to make good progress in our recovery. We are delivering what we set out to achieve. The Core Bank is becoming stronger. As we focus on serving customers better, profitability is also improving and rebalancing towards a more sustainable mix of business contributions.
"At the same time, the legacy risks and losses in Non-Core are being worked out effectively and our ambitious restructuring efforts continue apace. The accounting treatment of some balance sheet items is volatile and can sometimes obscure our underlying story.
"Nevertheless, I believe that our results today show clear and measured progress toward our three strategic goals:
1. Serving our customers better must be the foundation of everything we do. It is our mission. Across our businesses change is occurring to improve customer service, not least through the customer charters that now drive our UK retail and corporate banking operations.
Already we have customer satisfaction and market positions that compare well with our competitors. Our aspirations are higher still and we are investing to achieve them.
2. We are making the bank safer, stronger, and more resilient. We have delivered good progress on all our targets: reducing costs; strengthening our capital base; reducing our dependency on shortterm wholesale funding; improving our liquidity; and, reducing our leverage.
This activity should also ensure that RBS is well positioned to meet the very substantial uplifts required by international regulatory change in bank resilience in the areas of capital and liquidity, within the timetable given.
3. The profitable Core of RBS is the ultimate source of value creation for all of our shareholders; we need to produce profits above the cost of capital we use across business cycles. At present, as these Core profits build, they are partially offset by planned Non-Core losses.
We target continued improvement in this balance in 2011 and in the sustainable level of Core profitability. We have much still to do on the revenue lines. There is substantial management action in train targeting long-term improvements.
While economic challenges, especially interest rate-driven, and regulatory costs will impact the level of improvements targeted and their speed, RBS remains focused on achieving balanced progress across all our key objectives.”
