Uncertainty surrounding RBS remains after 1H

Our view on Royal Bank of Scotland has not changed following the interim results--our uncertainty rating remains

Morningstar analysts | 10-08-09 | E-mail Article

Royal Bank of Scotland Group posted a £3.4 billion operating loss in the first half of 2009, compared with a £150 million operating loss in the first half of 2008. First half 2009 operating losses were mitigated by a £3.8 billion gain on the redemption of part of its debt, but after other items, including taxes and preferred dividends, net loss to ordinary shareholders amounted to £1.0 billion. We do not expect to modify our fair value estimate and we reiterate the uncertainty rating given the bank's reliance in the still-nascent Asset Protection Scheme from the UK government.

A surge in income from the Global Banking & Markets division (which management expects will not last into the second half of this year) was offset by heavy provisions in both its core and wind-down businesses. Total provision charges were £7.5 billion, five times the first half 2008 number, and higher even than what the bank booked in all of 2008. The vast majority of these provisions relate to loans, which continued to deteriorate, jumping to 5.0% of loans, compared with 2.7% at the end of 2008.

As at June 30, 2009, RBS's Tier 1 capital ratio was 9.0%, compared with 9.9% and 8.6% at year-end 2008 and the first half of 2008, respectively. The first-half losses weighed heavily on the bank's capital, considering the debt exchange and preferred stock conversion performed earlier this year and the 2008 equity issuance, all of which enhanced the firm's common equity level.

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