That’s the early price action in RBS following the publication of annual results on Thursday morning, which have impressed the market.
Here’s why.
First the operating loss of £6.2bn, versus £6.9bn in 2008, was better than expected, as was the net interest margin at 1.76 per cent.
In a similar vein to Barclays, which reported results last week, there’s also some good news on bad debts.
Impairments for 2009 totalled £13.9bn, against the consensus forecast of £14.3bn. But more importantly, in the fourth quarter bad debts were £3.1bn, down from £3.3bn in the previous quarter.
Based on that improving trend, RBS reckons impairments have peaked:
Impairment losses increased to £13,899 million from £7,432 million in 2008, with Core bank impairments rising by £2,182 million and Non-Core by £4,285 million. Signs that impairments might have peaked appear to have been borne out in the fourth quarter, and there are indications that the pace of downwards credit rating migration for corporates is slowing. Nonetheless, the financial circumstances of many consumers and businesses remain fragile, and rising refinancing costs, whether as a result of monetary tightening or of increased regulatory capital requirements, could expose some customers to further difficulty.
Here’s the bad debt breakdown.
Moving on from bad debts to RBS’ investment banking division, Global Banking & Markets (GBM), the unit reported revenues for the year of £11bn and fourth quarter, operating profits of £871m, on revenues of £2.1bn. This was in line with expectations and is a pretty creditable performance given what analysts term “franchise concerns” — star bankers moving to rivals that aren’t state controlled.
It’s all the more important because GBM is the main profit driver at RBS — the division generated 70 per cent of group 2009 pretax profits before non-core losses according to Noumra.
However, there a few negatives; the Core Tier 1 ratio of 11 per cent was light — some in the City were looking for 11.7 per cent — and the net income line looks to have been boosted by a £2.1bn gain from closing the final salary pension scheme:
Pension curtailment gains of £2,148 million were recognised during the fourth quarter of 2009 arising from changes to prospective pension benefits in the defined benefit scheme and certain other subsidiary schemes.
But all in all not a bad set of numbers, which bodes well for Lloyds results due out tomorrow.
Some early reaction from the City:
Nomura:
Q4 trends were in line with, or better than, our estimates in most of the key areas, impairments, margin, the balance sheet and GBM performance. The company’s outlook commentary is also more positive than it has previously used. Current year estimates are likely to be improved and may even swing to profits from losses. All this is incrementally positive and also has a positive read across to Lloyds tomorrow.
However, we still regard the RBS longer term earnings power as likely to be too low to justify the valuation. To illustrate this point, profits before impairments for the year were £7.7bn. Even with a minimal impairment charge this is equivalent to EPS of 4.2p, even before the diluting effects of the EU mandated sales. Without either significantly higher operating profitability, substantial capital return or both, we would regard the shares as unattractive and regard any strength as a selling opportunity. The company expects core profitability to decline further in 2010, as capital market businesses ‘normalise.’ For those looking for leverage to these improved trends, Lloyds is on more attractive valuations, in our view.
Citi:
Initial reaction:
Strong margins the key story. RBS FY09 results are around 2% better (ie lower loss) vs Citi expectations and 4% better than consensus at Operating Profit/Loss level, which is the most relevant comparison, driven principally by lower than-expected impairments in the Non-core division and better revenues based on a jump in the NIM in 4Q09. Should drive consensus upgrades with a decent read-across for Lloyds on margins and CRE-related losses.
Improving Non-Core impairments.
Group-level FY09 impairments were £13.9bn, versus consensus £14.3bn and Citi £14.1bn. The 4Q09 impairment was £3.1bn, vs 3Q09 £3.3bn and 1Q-3Q09 £10.8bn. Within the Core division, FY09 impairments were £4.7bn, the 1Q-3Q figure was £3.4bn, so 4Q £1.3bn, which is up slightly on the 3Q09 £1.2bn. So the improvement in impairment is coming mostly in the Non-Core division where the 4Q09 charge was £1.8bn vs 3Q09 £2.1bn.
And Merrill Lynch:
Management are more positive on outlook talking about 2010 being another year of delivery. With the shares trading at 0.7x TNAV and results better than expected we would expect the stock to perform well and re-iterate the BUY rating.
Related links:
Revision and APS ambiguity at RBS – FT Alphaville
RBS losses narrow to £3.6bn – FT
BarCap’s ‘credit surprise’ snapback – FT Alphaville