The Royal Bank of Scotland Group plc: FY2017 Form 20-F Summary
Business context and reporting period
The filing is RBS Group’s annual report on Form 20-F for the fiscal year ended 31 December 2017, prepared under IFRS. The Group is primarily focused on banking and financial services in the UK and Republic of Ireland, with a focused international business. The filing is not a standalone Q4 report, although it discusses Q4 2017 segment realignment and business transfers.
Reportable segments after the Q4 2017 reorganisation were UK Personal & Business Banking, Ulster Bank RoI, Commercial Banking, Private Banking, RBS International, NatWest Markets and Central items & other. Comparatives were re-presented for the segment reorganisation, but certain 2017 business transfers were not retrospectively re-presented.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total income | £13,133m | £12,590m | +4.3% |
| Net interest income | £8,987m | £8,708m | +3.2% |
| Net interest margin | 2.13% | 2.18% | -5 bps |
| Operating expenses | £10,401m | £16,194m | -35.8% |
| Adjusted operating expenses | £7,551m | £8,220m | -8.1% |
| Operating profit before tax | £2,239m | Operating loss of £4,082m | Improved by £6,321m |
| Profit attributable to ordinary shareholders | £752m | Loss of £6,955m | Returned to profit |
| Impairment losses | £493m | £478m | +£15m |
| Operating cash flow | £38,741m | Outflow of £3,650m | Improved by £42,391m |
| Total assets | £738.1bn | £798.7bn | -7.6% |
| Net loans and advances to customers | £323.2bn | £323.0bn | Broadly stable |
| Customer deposits, excluding repos | £367.0bn | £353.9bn | +3.7% |
| Loan-to-deposit ratio | 88% | 91% | Improved |
| CET1 ratio | 15.9% | 13.4% | +250 bps |
| CRR leverage ratio | 5.3% | 5.1% | +20 bps |
| Liquidity coverage ratio | 152% | 123% | Improved |
| Net stable funding ratio | 132% | 121% | Improved |
Adjusted operating profit increased 31.1% to £4,818m. The statutory cost:income ratio was 79.0%, while the adjusted ratio was 58.2%. Statutory return on equity was 2.2%; adjusted return on equity was 8.8%.
Risk-weighted assets fell 12% to £200.9bn from £228.2bn. Risk elements in lending declined to £8.9bn, or 2.7% of gross customer loans, from 3.1%; provision coverage remained 43%.
Liquidity strengthened materially. The liquidity portfolio increased to approximately £186bn, including £124bn of primary liquidity. Wholesale funding was £82.8bn, customer deposits excluding repos were £367.0bn, debt securities in issue were £30.6bn and subordinated liabilities were £12.7bn.
Material changes versus the prior comparable period
- RBS returned to attributable profitability for the first time in ten years, compared with a £6.955bn attributable loss in 2016.
- Operating expenses fell primarily because 2016 included substantially higher litigation and conduct costs. 2017 litigation and conduct costs were £1.285bn versus £5.868bn in 2016; restructuring costs were £1.565bn versus £2.106bn.
- Adjusted costs, excluding litigation and conduct costs, restructuring costs and certain other items, declined by £810m, ahead of the £750m target.
- Net interest income rose, but margin pressure continued. UK Personal & Business Banking income increased 5.7%, while its NIM fell 11 basis points to 2.86%.
- Ulster Bank RoI moved to a £132m operating loss from a £20m profit, principally because 2016 included impairment releases and 2017 included additional impairment and customer remediation costs.
- NatWest Markets’ operating loss improved to £977m from £1.865bn. Its core business reported a £41m operating profit, while legacy assets continued to generate losses.
- Commercial Banking operating profit increased to £1.108bn from £742m, but impairment losses rose to £362m from £206m due mainly to a small number of single-name impairments.
- Customer lending growth across PBB, CPB and RBSI was 2.2%, below the 3% target. UK PBB mortgage lending remained the principal growth driver.
- RBS reduced legacy RWAs and wound up the former Capital Resolution business, with remaining legacy assets largely transferred into NatWest Markets.
- HM Treasury continued to own 70.5% of ordinary shares. No ordinary dividend was paid for 2017.
Guidance, outlook, commentary and unusual items
- Management retained its medium-term targets of a sub-50% cost:income ratio and above-12% return on equity by 2020, but withdrew guidance for an absolute 2020 cost base because of higher planned investment.
- Operating costs excluding restructuring and litigation and conduct costs are expected to decline in 2018, but at a materially slower rate. Restructuring charges are expected to total approximately £2.5bn across 2018 and 2019, including approximately £0.3bn for completion of the State Aid remedy and reintegration of the former Williams & Glyn business.
- Management expects bank RWAs to decline by £5bn to £10bn by the end of 2018, despite expected model-related RWA inflation in Commercial Banking.
- RBS plans to issue approximately £4bn to £6bn of MREL-compliant securities in 2018 and expects NatWest Markets Plc to issue approximately £2bn to £4bn of senior unsecured debt. The filing did not anticipate a need for AT1 or Tier 2 issuance at that time.
- Management expects to maintain CET1 above its 13% target, but identifies potential US Department of Justice costs, pension contributions, IFRS 9 impairment volatility, mortgage risk-weight floors, IFRS 16, Basel amendments and stress-test outcomes as capital risks.
- IFRS 9 took effect on 1 January 2018. The filing estimates a 30-basis-point favourable CET1 impact, while the opening equity impact was a £71m post-tax reduction. IFRS 9 is expected to increase impairment and earnings volatility.
- The UK ring-fencing regime takes effect on 1 January 2019. Planned transfers include moving most UK and Western European banking activities into ring-fenced entities, separating NatWest Markets as a non-ring-fenced bank and restructuring legal entities during 2018.
- The alternative State Aid remedies package replaces the planned divestment of Williams & Glyn. It includes a £425m Capability and Innovation Fund, a £275m Incentivised Switching Scheme, up to £75m for certain customer switching costs and a potential additional contribution capped at £50m.
- Material legacy matters remain, particularly US RMBS investigations and litigation, including the unresolved US Department of Justice matter. The aggregate RMBS provision was approximately £3.2bn at year-end.
- Other material provisions included £1.053bn for PPI, £870m for other customer redress, £641m for litigation and other regulatory proceedings and £1.950bn for property and other matters.
- Management reported a positive start to 2018, but stated that this was subject to the filing’s forward-looking statement risks.
Most important facts for investors to verify
- Whether additional US DOJ, RMBS, FX, LIBOR, SME/GRG, PPI, tracker mortgage or other conduct costs exceed recorded provisions.
- Execution, timing and final cost of UK ring-fencing, NatWest Markets restructuring, the State Aid remedies and the proposed legal-entity transfers.
- Actual IFRS 9 impairment trends and whether the 30-40 basis point through-cycle loss guidance remains appropriate.
- Whether CET1 remains above 13% after litigation, pension, RWA inflation, regulatory and stress-test impacts.
- Progress toward the sub-50% cost:income ratio and above-12% return-on-equity targets, particularly after the planned increase in transformation investment.
- Funding needs, MREL issuance costs, credit-rating changes and the standalone liquidity position of ring-fenced and non-ring-fenced entities.
- Potential pension contributions following the 31 December 2018 triennial valuation and the restructuring of pension arrangements required by ring-fencing.
- Exposure to UK economic weakness, Brexit-related disruption, higher unemployment, household indebtedness, interest-rate increases, property-price declines and commercial credit deterioration.
- Reliability of reported adjusted metrics, since these non-GAAP measures exclude restructuring, litigation and conduct costs, strategic disposals and other items.