July 13th, 2014
On 2 May 2014, the Royal Bank of Scotland’s New Zealand-born chief executive, Ross McEwan, unveiled a surprisingly strong set of financial results for the bank that he has led since 1 October 2013. But has it really turned the corner?
McEwan the and RBS’s outgoing finance director Nathan Bostock then answered questions from financial journalists in London. Here is a transcript of the session (also available on the RBS website)
Operator: Good morning, ladies and gentlemen. Today’s conference call will be hosted by Ross McEwan, RBS Chief Executive. Please go ahead, Ross.
Ross McEwan: Good morning, everybody. Two months ago, I set out a plan for this bank. It was a very straightforward plan focused on building the number one bank for trust and service in the U.K., for this bank to further improve its performance, to regain trust, to realize its full potential and to provide a much better service towards customers and the general public.
The results we’re posting today show the steady progress that we are making as we take the steps to be a much simpler, smaller, and fairer bank. Yes, we still have a lot of work to do and plenty of issues from the past to reckon with. But today’s results show that in steady state, RBS will be a bank that does a great job for customers while delivering good returns for our shareholders. You will see from our results that we’ve started to cut costs out of the business and invest in what matters to customers so that we can earn back their trust again.
We have moved from seven divisions with a complex mix of support functions which surround them to three customer businesses – Personal, Commercial, and Corporate. During the quarter, we have put the executive teams for these new businesses in place. And from the half year, we will change reporting structures so that you can see how they are performing for their customers and for shareholders. And we have started to deliver on the commitments to the customers I made on the 27th of February.
I said we would call time on teaser rates and zero balance transfers, these things that erode at the trust of our customers, and that is exactly what we have done. Across our RBS and NatWest brands, our personal customers can be assured that, bar one exception that will be removed in September, they can enjoy the same deals and benefit from the same rates that we offer new customers.
We have ensured that pricing across the bank is consistent for personal customers, and we are committed to ensuring this is the same for small business customers by the end of the year. We are making good progress on our promise to be a much simpler bank for our customers. We have already reduced by 1/4 the number of personal and small business products, and by the end of the year, we will have cut this by half. We aren’t just talking about the customer – we’re getting on and doing the right things for them.
From there, I’d like to hand over to Nathan who will take you through the numbers before we take your questions.
Nathan Bostock: Thank you, Ross. Good morning, everyone. I would like to give you a brief overview of the first quarter’s performance before leaving plenty of time for your questions.
The key features of the quarters were – we reported a first quarter attributable profit of GBP 1.2 billion, up over GBP 800 million on a year ago, helping to lift our book value in the quarter. Ulster Bank returned to a small profit, the first time for five years. We have reached agreement with the government for the future retirement of the dividend access share.
The first quarter has seen an improved performance across the businesses. However, while we’re seeing encouraging early signs of momentum, we know we still have a long way to go and we expect to face further headwinds in the coming quarters.
Turning to the detail of our Q1 financial performance and the key lines of the profit and loss account. Q1 total income of GBP 5.1 billion was down 2 percent, compared to quarter one 2013, but up 28 percent on the fourth quarter. Versus a year ago, higher income in U.K. Retail, U.K. Corporate, and gains on our treasuries securities was outweighed by revenue declines in Markets and International Banking as we rightsized these businesses. Net interest margin improved 18 basis points year-on-year, and four basis points quarter-on-quarter to 2.12 percent. The year-on-year move is driven by re-pricing initiatives across a number of divisions.
Costs improved 6 percent year-over-year and 2 percent on the prior quarter. The year-over-year cost reduction reflects good cost control in Retail & Commercial, as well as progress on the rightsizing of Markets.
We are working hard to implement the new cost reduction plan and expect the benefits to begin to accrue in the second half. We reiterate our plan is to reduce total costs by GBP 1 billion this year. Restructuring costs relating to these changes will be reflected over the coming quarters. The cost income ratio for Q1 improved year-on-year by two percentage points to 66 percent as costs reduced faster than income.
Impairments improved further in Q1 ’14, down 65 percent on a year ago. Ulster Bank saw a strong improvement in impairments, reflecting improving mortgage arrears. U.K. Corporate impairments benefited from the absence of large individual cases, while RBS Capital Resolution saw partially offsetting recoveries of circa GBP100 million.
Group coverage of nonperforming loans remained strong at 65 percent, up 13 percentage points year-over-year. Q1 operating profit of GBP 1.5 billion is more than double the Q1 profit a year ago. As mentioned, we recorded a Q1 attributable profit of GBP 1.2 billion, reflecting improved cost and impairment performances. Tangible net asset value per share was 376 pence, up 13 pence from the year end.
Looking at the highlights from our businesses, the Retail & Commercial businesses saw a Q1 operating profit of GBP 1.4 billion, up 36 percent on a year ago. This increase in profit was seen across all the Retail & Commercial businesses, with the exception of Citizens, which was also impacted by the strengthening of sterling versus the dollar.
Looking at U.K. Retail and U.K. Corporate, their Q1 performance improved year-on-year, driven by stronger revenues and improved impairments. Both these businesses saw balance sheet growth in the quarter. Net mortgages grew by GBP 1.2 billion, while SMEs drew down GBP 2.4 billion of new loans in Q1, up 23 percent on Q1 ’13.
Markets operating profit increased 14 percent year-on-year. Q1 revenues were down 8 percent on Q1 ’13 and included some gains on deleveraging and de-risking the business in the quarter. Costs were down 15 percent over the same period as the reshaping of the business continues. Markets risk weighted assets were GBP 87 billion at the end of the quarter.
RBS Capital Resolution got off to a strong start in its first quarter. Operating losses were held to only GBP 114 million, while funded assets declined by GBP 4.6 billion or 16 percent to GBP 24 billion, including GBP 2.4 billion from runoff and about GBP 1.9 billion from disposals.
Turning to capital. We finished the quarter with a fully loaded Basel III Core Tier 1 ratio of 9.4 percent, up 80 basis points on the last quarter. The improvement includes 30 basis points increase from retained earnings and 30 basis points gain from RCR reduction.
We reaffirm our 2016 target of a fully loaded Basel III Core Tier 1 ratio of greater than 12 percent. Our leverage ratio was 3.7 percent, an improvement of 20 basis points in the quarter. We continue to target a medium-term leverage ratio of greater than 4 percent.
And with that, I’ll hand back to Ross.
Ross McEwan: Thanks very much, Nathan. I think we’ll just open up the questions now.
Operator: Thank you, Ross. Ladies and gentlemen, if you would like to ask a question, please press the star key followed by the digit one on your telephone keypad. We will pause for a moment to give everyone an opportunity to signal for questions.
And your first question comes from the line of Jill Treanor from The Guardian. Please go ahead.
Ross McEwan: Hi, Jill.
Jill Treanor: Hi, good morning. I wanted to ask you about the government’s decision last week to stop you from doing what you wanted to do with the bonus cap. You talked in a statement about trying to mitigate the impact of the commercial and prudential risk you think this will cause. What are you going to do? Are you going to increase everybody’s salaries?
Ross McEwan: It’s clear that the government and the regulators did not believe that the bonus cap in the CRD IV is the right policy response and we agree with that stance. Look, we also know that pay is an emotive issue which is why, you know, if the (CI) try to take that distraction away and why also that RBS continues to be a back (marker) on pay. CRD IV affects – actually a very small number of our employees, but it’s a key time in our restructuring and we’ve said this all along that it’s important that we stay in the pack rather than being stuck out on our own as we do change this business. CRD IV also, as you and I know, gave shareholders the right to direct policy in this area, and we understand the difficult position that put our major shareholder in, and you saw that last week. We’re not going to pretend that this is ideal. That was our statement last week. Not having the flexibility does involve an element of risk for us but it’s a risk that, you know, as RBS chief executive, I’m going to have to manage. As I said, it makes, it takes a small number, and we will have to make some changes to those people to make sure we hold on to them.
Jill Treanor: Yes.
Ross McEwan: And we will manage under the one for one. And really, I can’t say anything more at this point. We’re working through the process internally. And we look to retain our key people, that small number of them that do get affected by this.
Jill Treanor: OK. Just very quickly, a follow-up to that before I ask another question. How many people is it? And are you going to raise their salaries?
Ross McEwan: No, it’s a small number, a very small percentage of our team. We’re working through those numbers at the moment. And all I can say is that I just want to make sure that we’re in a position to pay those people so I can retain them for the value of this business.
Jill Treanor: OK. I just want to ask quickly about Ulster Bank. It’s being suggested, I think, in the Irish Press that you might be looking at some sort of partial float of the business or possibly– is that the case?
Ross McEwan: Well, first off, we announced in our strategy on the 27th of February that we were staying in the Republic of Ireland and Northern Ireland. And the solution for Northern Ireland was to connect it far closer to the retail and small business operations under Les Matheson.
The Republic, we also said that we want to make sure that, (A) we stay there, but (B), just try to create some far better economies of scale and we were happy to work with other parties on that. And I haven’t got any further updates but hope to be able to give you an update on that after summer as we work through the options there.
Operator: Thank you. And your next question comes from the line of Nick Goodway from the Evening Standard. Please go ahead.
Nick Goodway: Good morning, Ross. And can you tell us a little bit more detail. I know you said it’s a small number, but you say these are the kind of people who are key to the restructuring of the bank, some people think they’re all just investment bankers. What sort of split out? And have you seen anybody, actually, tempted to go away since that decision was made?
Ross McEwan: Well, first off, all banks are going through this review now, be it under two for one or a one for one. So, we’re all working our way through it. And as I said, it is a small number. It covers mainly across three areas of our bank – yes, in the markets division, which is very much an international part of the bank and operates an international market, different countries around the world. Secondly, we’ve got a small number of very experienced people working on restructuring our portfolios in Rory Cullinan’s areas that are highly specialized. And the third area is the U.S. market where we have, you know, the ninth largest bank in the U.S. that needs to operate in its own market and it’s a far lower salary base and higher incentive arrangements in that market. So, those are the three key areas that we are focusing on that get affected by one for one rather than two for one. And my objective is to make sure that we can pay these people so that we continue to perform and have a very good business for our customers.
Nick Goodway: Thank you.
Operator: Thank you. And our next question comes from the line of Matthew Scuffham from Reuters. Please go ahead.
Matthew Scuffham: Hi, yes, can you just tell us first one on Citizens, can you confirm whether your, whether it’s still the intention to kick off the IPO this year despite the Fed’s stress test setback.
Ross McEwan: Yes, it is. Certainly, as in our intention to stay with our plan for our fourth quarter IPO, still on plan. We believe that’s the best route for maximizing shareholder value. And as we said on the 27th of February, the same route that we took DLG through which showed a very good return on that business over a period of about 18 months. So, that, in our view, is the best option for this business and still on plan.
Matthew Scuffham: OK. And the second question – are you disappointed that some of your biggest shareholders are suing you over a legacy issue? Would it be better to settle now rather than risk everything being dragged up in an ugly court case possibly featuring the likes of Fred Goodwin?
Ross McEwan: Look, major investors have a duty to pursue legal claims on behalf of their investment clients if they consider that the potential benefits outweigh the potential cost. So, we understand their issue. We believe we have strong defenses to the claims that are being brought against the bank. And that is why we intend to defend this vigorously and to protect the interest of our shareholders including U.K. taxpayers. So, look, we understand the, sort of, motives that drive the large investors, but at the same time we believe we have got some strong defenses against these claims. And therefore, that’s the reason why we, you know, these things are being seen out in court as opposed to any settlement. I think we’ve got a good defense on this.
Operator: Thank you. And our next question comes from the line of Patrick Hosking from The Times. Please go ahead.
Patrick Hosking: Good morning, Ross. Can you just – as usual, it’s a bit like grappling with blancmange with your figures and I’m struggling to get, to come to terms with the fact you’ve doubled profits in this quarter. So, what is – is that a freak result? And to what extent is it telling us about the future? And can you also say a little bit more about RCR and why the losses were lower than you’d expected? And you say that losses for the full year will be within guidance, what is guidance, please?
Ross McEwan: Yes, look, thanks very much. We gave – I’ll pass it to Nathan shortly, but we gave guidance on 27th of February, just around those, so I think we will probably reinforce that. Look, these results, I think show – well, I know, show the results that RBS can put out when we do not have a continuation of one-off activities. So it just shows the very strong franchises under the RBS brands that we have. And when they perform, this is a great business both for customers and for shareholders. That’s one of the key features that came out in our strategy that we launched on the 27th of February.
Patrick Hosking: So, this is …
Ross McEwan: You are seeing a number of things coming together here. One, we haven’t started the heavy restructuring of this business that will come through over the remainder of 2014; therefore, the restructuring cost in the first quarter are lower than what they will be in the next three quarters. So that’s one feature. You saw loan impairments well down on the same quarter last year. So, that one is really to do with, has the economy improved to that perspective and some of the restructuring that we took on the business at the final quarter of last year’s flowing through.
And thirdly, RCR, I mean they have a series of assets they’re taking off the books. As you would imagine, the easier to sell assets come off the books earlier is one feature but the second thing is there are a lot of buyers of these assets out in the marketplace at the moment. So, I’ve described it as, in sort of yachting parlance. We’ve got a yacht out there with a spinnaker up and there’s a good breeze behind it. But, you know, our anticipation as we get into the tougher assets, you know, we will have to use a lot more of our loan impairments to actually come through into the accounts. But I’ll hand over to Nathan. You may have some comments here.
Nathan Bostock: Yes, Ross. I mean just to, perhaps just be a little bit sort of more specific on that RCR one, remember there’s a number of moving parts in RCR so you have the income on the assets, you have the cost of, actually, the operation, you have disposal losses and you have impairments. The overall number that we have guided to for the year is circa 1.5 billion loss and that is obviously against the 114 million loss that we’ve shown in the first quarter.
Ross McEwan: And similar on our restructuring.
Nathan Bostock: That’s right.
Ross McEwan: We haven’t changed our guidance on the restructuring either in the first quarter. Because we were starting to doing the planning for the restructure that builds into the following three quarters and that’s therefore the charge we’re taking in those quarters. You can’t frontload the charge.
Operator: Thank you. And our next question comes from the line of Sharlene Goff from the Financial Times. Please go ahead.
Nathan Bostock: Hi, Sharlene.
Sharlene Goff: Hi, good morning. Hi. Just wondering if you could give your views on the U.K. housing markets. Quite strong warnings coming out of the Bank of England, that we are facing a bubble. Do you agree with that? And what’s your view?
Ross McEwan: Look, the housing market has proved to be a lot stronger over the last six to 12 months. You’re seeing growths in the market and the growth starting to happened outside of the London market as well. And it’s very clear from our perspective we’re open for business in the mortgage markets. And, you know, we continue to see some strong growth coming through onto our book. We have participated also in the Help to Buy and that has, I think, been a small factor of getting, ticking the markets on. But you are seeing a stronger market.
The question around is there a bubble? To be quite honest I don’t think there is a bubble. What you are seeing is more people wanting to get into the housing market for five years that they probably stayed out of it. So, you are seeing some catch-up in that area. But I think it’s up to banks as much it is, as it is the regulator to actually make sure that we are controlling what comes on to our books and that we’ve got customers that have the ability to repay. And that’s why in our stress testing, when we take the customer on, we do the stress test against a much higher interest rate than what they’re actually paying today.
Sharlene Goff: And are there any sort of precautions that you’re taking around lending particularly in London at the moment?
Ross McEwan: So, we have a very strong risk appetite statement that looks at things like regional differences, it looks at things like loan-to-value ratio, how much loan to value pieces we take on to our book. And I think it behoves the banks to stay within their risk appetite statements.
Operator: Thank you. And our next question comes from the line of Max Colchester from The Wall Street Journal. Please go ahead.
Max Colchester: Hi, Ross. Can you just give us a bit of an update on what you’ve seen happening in Ireland? Obviously impairments have come down a lot there? Is that sustainable, or is this also kind of freak quarter for you over there?
Ross McEwan: So, we have seen improvements in the Irish economy as you would have seen. We are seeing the housing market, just mainly in the major centers starting to pick up again. So, I think the constant declines that had been seen over the last four or five years have stabilized. And you’re seeing uplifts in pricing now which does help. And you’re seeing a much better Irish economy which means, you know, not a lot of unemployment, people with money again, people again prepared to make some changes in their circumstances particularly around the housing and around small businesses.
So, those are the major features. Ireland has been a major problem for us as an organization. It’s becoming a lesser problem from a loan and impairment. And as you’ve seen the account, it’s the first time since first quarter of 2009 that we’ve actually made a profit in Ireland.
Max Colchester: Thanks. And also, have you ruled out sale of Citizens at this stage?
Ross McEwan: Now, our first and number one plan is to sell through an IPO. We haven’t changed our view on that, we believe it does maximize shareholder value. Look, if the business is worth more to someone else than it is to us, you know, it’s our duty to look after the shareholders; you know, we’ll take a serious look. But we’ve always been consistent in our view that a fourth quarter IPO is a path we’re on and Bruce Van Saun, who’s the CEO of Citizens, and Rory, who’s in charge of the sales process from the RBS end are very clearly focused on that.
Operator: Thank you. Our next question comes from the line of James Salmon from the Daily Mail. Please go ahead.
James Salmon: Good morning.
Ross McEwan: Hi, James.
James Salmon: Just on PPI, could you give us an indication as to whether you think you’re going to have to make any provisions in the future? Or do you think that, that might be it for PPI? And, Nathan, you mentioned headwinds coming up in the next few quarters. Could you give us a flavor of what you expect there? And finally, on the housing market, the mortgage market review, what impact do you think that will make? And do you think it could cause a slowdown in the housing market?
Ross McEwan: Well, first off, with PPI, we do a review on our provisions on all of our areas of claim. PPI didn’t warrant any changes to our provisioning. For the first quarter, we will obviously review it on a quarterly basis, and we were reasonably comfortable with our provisions at this point in time. Nathan, I might pop you over …
Nathan Bostock: Do you want me to do that?
Ross McEwan: Yes.
Nathan Bostock: Yes. OK. Again, yes, really just trying to ensure that the people are looking at the first quarter, you know, in the light of what it is, which is, you know, a quarter. Looking more to the full year, probably the three main areas that I would highlight, the restructuring numbers that Ross has already mentioned, in other words, as we continue to carry out our cost reduction, it will come with restructuring cost. I think the RCR, so I’ve just mentioned, there’s a different number for the full year versus that that we’re seeing within the first quarter.
Impairments, whilst impairments are showing a positive trend, we do have some releases in the first quarter. We don’t have any large individual one-offs, and so therefore, there is potential for impairments to be higher than the number in the first quarter but still an improving trend. And then, of course, there’s also the conduct side, which, again, we just talked about PPI, but again things always remain uncertain. So, that’s really just to make sure that people are fully aware of those items.
Ross McEwan: And just on the mortgage market review – look, I’m very supportive of the review and all that it does to raise standards across the industry. But the main aim of ensuring that customers can make their ongoing obligations for mortgage payments so I think that’s in everyone’s interest by customers and organizationally. We’ve been taking a number of changes to our systems and processes over quite some period of time building into MMR. And we’ve made sure that all of those standards plus others are in place for our mortgage lenders. It is a part of the business that we have been expanding with more mortgage advisers both face to face and telephony. And we’re starting to see the growth, it’s good quality business and I think that’s what’s, you know, organizations need to be focused on.
And it does ensure that we’re asking the right questions to customers about their ability to repay, that they understand it. There can be shocks over time with interest rates in making sure they’re getting the right product. So, we’re very comfortable of what’s going on there.
Operator: Thank you. And your next question comes from the line of Harry Wilson from the Daily Telegraph. Please go ahead.
Ross McEwan: Hi, Harry.
Harry Wilson: Good morning. I was quite interested in your spending on IT security. You’re spending £750 million this next three years I think it is. Can you talk a bit more just about exactly where that money is going on?
Ross McEwan: Well, first off, Harry, the £750m was both on security but also on resilience given that we had some difficulties with our systems over, nearly two years ago now. And over the next five years, we will be spending around £7 billion on our IT infrastructure. It’s a vital part of any banks’ offering to customers. You do need to have great IT. And we want to ensure that we have that. So, really, the thing that drive us is, one, around security, making sure that money is safe and customers are safe in dealing with us but it’s also making sure that the systems stay up 100 percent of the time because anytime offline across any channels, it’s just totally unacceptable. So, that’s why we’re spending the money. It is on resilience as much as it’s on security both of them essential in banking.
Harry Wilson: And just as a follow-up question, just on the, your markets business. Can you just give a bit more detail exactly what you’re seeing in that business? And also, I guess, linked with this but how quickly do you intend to bring down the size of the U.S. business in order that you don’t have to comply with the Foreign Companies Holding Act?
Ross McEwan: Yes, look, we laid a pretty clear plan in February about markets business, and you’re right, that it was already on the path of being a smaller part of the business, but what we did was very clearly established that it’s there to support our major corporates both in the U.K. and as we trade offshore and also financial institutions. So, it’s there to provide services and products to our key customers and that’s our core aim.
The reduction in the risk-weighted assets were laid out in February, and I’ll pass over to Nathan very shortly. And Peter Nielsen and the team are working very closely with Donald on just what other services that are needed for our corporates. And I think they’ve done a wonderful job over the last 12 months of getting this business back into shape. All markets businesses are requiring far more capital to support these businesses. And I think you’re seeing every bank having to reassess what’s happening in their markets operations with a greater capital load.
OK. Costs have come down 15 percent and that’s really driven the success of this business because the revenue that would come out of product sets has declined and, you know, we still have a lot of work to do in this business but heading in the right direction.
Nathan Bostock: You know, I just picked up a couple of points probably worth making. Again, if you’re looking sort of year-on-year, for instance, and versus competitors, year- on-year, it’s worth remembering that last year, we had a lot of uncertainties around the first quarter and therefore actually our number was generally lower. So, a relative number this year has to be based against that.
We also have circa £100 million of one-offs really that came out of the deleveraging of that business that are in the numbers this quarter. So, when you look at it, the performance, certainly for a (fixed-based) business is much more in line with, particularly, something like the European counterparts. I actually think that’s a very good performance but we have to put it in the right context. And typically, again, you know, we have forecast that overall market revenues are coming down and we’ll continue to reflect that through this year.
Operator: Thank you. And our next question comes from the line of Amber Choudhury from Bloomberg. Please go ahead.
Amber Choudhury: Good morning. Just a quick question in relation to conduct. Just wondering if there’s been any update on the foreign exchange probe?
Ross McEwan: Amber, no change in our guidance and update that we gave in February, nothing that we’ve seen that’s changed since that guidance that we gave.
Amber Choudhury: OK. Thanks.
Operator: Thank you. And our next question comes from the line of Dominic Elliott from Thomson Reuters. Please go ahead.
Dominic Elliott: Good morning, Ross, good morning, Nathan. I just had a question on behalf of Breakingviews. It’s another one on I.T. You say that you moved your batch scheduler onto three dedicated and separate versions. I just wanted to understand first what that means. Is that in line with what you’re saying about resilience earlier? And having looked at this, you know, with a fresh pair of eyes, I suppose, do you see that the problem that you’ve had previously has been one mainly under investment? But was there something else going on, was there a structural problem as well?
Ross McEwan: No. Well, the change to our batch scheduling certainly was part of our resilience in making sure that the essential features went through first and cutting down one very large batch process that went overnight and to actually I think it was four different portions to make them a much more manageable chunk of business that’s processed. And therefore, we have three layers of backup to them as well, which is I think world class standard now for resilience which is our key feature.
Look, I think any bank needs to invest in its technology. We’re certainly doing that and we’ve committed to that over the next five years. And, you know, as I said, having your systems down for any period of time is totally unacceptable. So, you know, that’s where our investments going.
Dominic Elliott: OK. Thanks.
Operator: Thank you. And there are no more further questions at this time. I would now like to hand the call back to Ross for any closing comments.
Ross McEwan: Look, thanks very much for joining the call. Look, I was pleased with the results, they do show an RBS, you know, that has very strong franchises, that can deliver good returns both to shareholders and to customers. There’s a lot of hard work ahead of us as Nathan quite clearly pointed out as we head into the three quarters of this year. But it’s nice to start the year well. And our job is to earn the trust of our customers again because that will produce a much better business for RBS’ customers and at the end, shareholders. So thanks for your time this morning. Cheers.
Nathan Bostock: Thank you.
Operator: Ladies and gentlemen, that will conclude today’s call. Thank you for your participation. You may now disconnect.