6th Dec 2007 07:00
Royal Bank of Scotland Group PLC06 December 2007 THE ROYAL BANK OF SCOTLAND GROUP PLC Pre-close Trading Update 6 December 2007 Highlights • RBS (excluding ABN AMRO) operating profit and earnings per share in 2007 expected to be well ahead of market consensus* • Group capital ratios at end 2007 expected to be comfortably within our target ranges of 7% to 8% for Tier 1 capital and 11% to 12% for total capital • Credit market deterioration in the second half is expected to result in write-downs of £950 million • Gains on planned operating disposals have benefited from strong investor demand • Excluding the net positive impact of these write-downs and gains, results are still expected to be comfortably ahead of consensus • ABN AMRO Group adjusted earnings consistent with previous guidance • Integration of ABN AMRO progressing well. Transaction benefits, return on investment and earnings accretion slightly higher than forecast Sir Fred Goodwin, Group Chief Executive, said: "Rarely have the diversity and quality of the Group's business platform beenmore important in enabling us to deliver consistently strong performance.Although some of our businesses have been affected by the challenging marketconditions, the Group's underlying earnings trajectory has remainedcomparatively unaffected. The integration of ABN AMRO is off to a promising start, and we now anticipatebetter financial returns than we envisaged at the time of the bid. Moreimportantly, the increased exposure to many high growth economies that ABN AMRObrings us seems more attractive and relevant than ever." Introduction The Royal Bank of Scotland Group ('RBS') will be holding discussions withanalysts and investors ahead of its close period for the year ending 31 December2007. This statement sets out the information that will be covered in thosediscussions. Comments relate to expected results for the full year ending 31December 2007, unless otherwise stated. RBS excluding ABN AMRO RBS has continued to perform well in 2007, with operating profit and earningsper share expected to be well ahead of the market consensus forecast. Resultshave been restrained by credit market deterioration in the second half, which isexpected to result in write-downs in income of approximately £950 million. Theseinclude write-downs of approximately £950 million on our exposures to USsub-prime mortgage markets (see Appendix) and £250 million on our leveragedfinance portfolio, partially offset by a reduction of approximately £250 millionin the carrying value of our own debt carried at fair value. Results have beenaided by strong gains on planned realisations. Excluding the net positive impactof the write-downs and gains, operating profit is still expected to becomfortably ahead of the consensus forecast. In achieving this robust underlying performance, the Group has benefited fromthe diversity of its income streams and the strength of its franchises. TheGroup is expected to deliver good organic growth in net interest income as aresult of strong growth in loans and advances and even stronger growth indeposits from both personal and corporate customers. Group net interest marginis expected to be slightly lower in 2007, in line with previous guidance.Non-interest income, excluding the impact of the gains and write-downsidentified above, is expected to increase modestly in 2007 and to continue toaccount for more than 60% of total income. Reported income growth for 2007 willbe adversely affected by the weakness of the US dollar relative to sterling. Good expense discipline is expected to result in a further improvement in theGroup's cost:income ratio in 2007. This improvement reflects continuingproductivity gains in Manufacturing and good cost control in other divisions,coupled with selective investment in faster-growing businesses. Overall credit metrics remain strong, with improvements in both UK personal andcorporate impairments. At Citizens, impairment provisioning has stepped up to amore normal level, reflecting the impact of the weakening US real estate marketin the second half on some elements of its portfolio. Group impairment lossesare expected to be flat as compared with 2006, and to fall as a percentage ofaverage loans and advances. RBS Divisions Global Banking & Markets' growth has been slowed by credit market conditions inthe second half, with write-downs on US sub-prime mortgage and leveraged financeexposures mitigated by a gain on the sale of Southern Water. Excluding theseeffects, GBM is expected to show good underlying growth in both income andoperating profit in 2007. GBM's strong customer franchises and diversificationby product and geography have enabled it to deliver excellent growth in many ofits businesses, including rates, currencies and project and export finance. Itcontinues to make very good progress in Europe and Asia and to make measuredinvestments in these regions. UK Corporate Banking has reinforced its position as the UK's leading corporatebank with another good performance in 2007, including strong growth in bothloans and advances and customer deposits. Overall, we have not seen anydeterioration in corporate credit quality. Retail Markets has achieved good results, with strong growth in deposits and inbancassurance sales. Wealth Management continues to deliver excellent growth,both in the UK and internationally, particularly in Asia. We have maintainedgood momentum in business banking, but have continued our cautious approach tomortgages and direct personal unsecured lending. Credit quality has continued toimprove in personal unsecured lending and has remained stable in other areas.Costs remain tightly controlled. Ulster Bank has continued to perform well across the island of Ireland, withstrong growth in loans and advances, particularly business lending, and indeposits. Credit quality has remained stable. Ulster Bank continues to invest inits product and distribution capabilities, to support future growth. Citizens has continued to diversify its product footprint, with good progress incommercial banking and in its payments businesses. Margins have shown someimprovement but underlying business volumes have remained subdued, reflectingdifficult market conditions. Expenses remain under tight control. Impairmentprovisioning has stepped up to a more normal level, reflecting the impact of theweakening US real estate market in the second half on some elements of Citizens'portfolio. Citizens' reported results will be affected by the weakness of thedollar. RBS Insurance continues to focus on selective underwriting of more profitablebusiness, acquired mainly through its direct brands. Results have been held backby the impact of the unusually severe floods in June and July, partiallymitigated by the improving risk profile of our book. Manufacturing continues to deliver good productivity gains in support ofbusiness growth in our customer-facing divisions, while continuing to invest inour property portfolio. Technology and operations costs remain tightlycontrolled. Capital and funding RBS Group's capital ratios at the end of 2007 are expected to be comfortablywithin our target ranges of 7% to 8% for Tier 1 capital and 11% to 12% for totalcapital, as a result of strong profitability, continued focus on balance sheetmanagement and planned disposals. We have experienced strong deposit growth in the second half and RBS's fundingand liquidity position remains strong. Investor demand for commercial paperissued by RBS's conduits, which have no exposure to US residential mortgages,remains strong. ABN AMRO ABN AMRO's adjusted** earnings for 2007 are expected to be consistent with theguidance it issued on 17 September 2007. These results include write-downs on USsub-prime mortgage exposures (see Appendix) which have now been valued using thesame approach as RBS. The integration of ABN AMRO is progressing well. Since completion of theacquisition, RBS has validated its plan and now expects to deliver transactionbenefits somewhat greater than anticipated in the offer for ABN AMRO announcedon 16 July 2007. Based on RBS's revised forecasts for business growth and transaction benefits,the acquisition of the ABN AMRO Businesses is now expected to lead to slightlyhigher earnings accretion and return on investment than previously indicated. Capital ratios remain in line with previous guidance, and ABN AMRO's funding andliquidity position remains strong. Investor demand for commercial paper issuedby ABN AMRO's long-established conduits, less than 0.5% of whose assets relateto US sub-prime residential mortgages, remains strong. Accounting presentation RBS statutory accounts for 2007 will consolidate 100% of ABN AMRO Group'sresults for the period from 17 October 2007 to 31 December 2007, with theinterests of Fortis and Santander shown as minority interests. RBS also intendsto publish pro forma results incorporating the results of the ABN AMROBusinesses to be acquired by RBS for the same period. Ahead of the publicationof its 2007 results, RBS expects to provide pro forma numbers for 2006 and1H2007 on the basis of a revised reporting structure, and a divisional analysisfor the Group including the ABN AMRO Businesses. A further update on progresswith the ABN AMRO integration will be provided at the 2007 results presentationon 28 February 2008. Appendix: US sub-prime exposures The Royal Bank of Scotland Group's Global Banking & Markets business (GBM) has aleading position in structuring, distributing and trading asset-backedsecurities (ABS). These activities include buying mortgage-backed securities,including securities backed by US sub-prime mortgages, and repackaging them intocollateralised debt obligations (CDOs) for subsequent sale to investors. Itretains exposure to some of the super senior tranches of these CDOs. There is noexposure to these instruments in the banking book. At 30 November, GBM's exposure to these super senior tranches, net of hedges andwrite-downs, totalled £1.1 billion to high grade CDOs which include commercialloan collateral as well as prime and sub-prime mortgage collateral, and £1.3billion to mezzanine CDOs based predominantly on residential mortgagecollateral. The CDOs are largely based on ABS issued between 2004 and the firsthalf of 2006. GBM also had under £1 billion of exposure to sub-prime mortgagesthrough a trading inventory of mortgage-backed securities and CDOs, and £0.1billion through securitisation residuals. GBM has no exposure to StructuredInvestment Vehicles (SIVs) or to SIV-Lites. In the second half of 2007, rising mortgage delinquencies and expectations ofdeclining house prices in the US have led to a deterioration of the estimatedfair value of these exposures. Our valuations of the ABS CDO super seniorexposures take into consideration outputs from our proprietary model, marketdata and prudent valuation adjustments. Our trading book exposures and residualsare marked to market on the basis of direct prices, where available, orobservable market benchmarks, as detailed in the table below. Exposure net Average price of hedges and post write-down write-downs at 30 November £m %Super senior tranches of ABS CDOsHigh grade CDOs 1,100 90Mezzanine CDOs 1,256 70CDO squared 0 n/aSub-prime trading inventoryInvestment grade 717 89Non-investment grade 218 46Residuals 86 47 The resulting write-downs in income are expected to total approximately £950million in the second half. ABN AMRO At 30 November, ABN AMRO had exposure of £1.7 billion to super senior tranchesof high grade ABS CDOs, net of hedges and write-downs, and no exposure tomezzanine ABS CDOs. ABN AMRO also held a trading inventory of junior CDOtranches and mortgage-backed securities totalling £0.05 billion, net of hedgesand write-downs. ABN AMRO has no exposure to SIVs or SIV-Lites. Exposure net Average price of hedges and post write-down write-downs at 30 November £m %Super senior tranches of ABS CDOsHigh grade CDOs 1,667 90Mezzanine CDOs 0 n/aCDO squared 0 n/aSub-prime trading inventory 51 26Residuals 0 n/a Applying the same valuation methodology used by GBM, we expect to bookwrite-downs in income on ABN AMRO's exposure to US-mortgage related assetstotalling approximately £300 million in the second half. These write-downs will be reflected in 2007 results for ABN AMRO but will notaffect the Group's earnings as they will be dealt with as part of theacquisition accounting adjustments. CONTACTS Sir Fred Goodwin Group Chief Executive 0131 523 2203Guy Whittaker Group Finance Director 0131 523 2028Richard O'Connor Head of Investor Relations 0131 626 1014 0207 672 1758 For media enquiriesAndrew McLaughlin Director of Economic and Corporate Affairs 0131 626 3868Carolyn McAdam Head of Group Communications 0131 523 2055 This announcement contains forward-looking statements, including such statementswithin the meaning of Section 27A of the US Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. Thesestatements concern or may affect future matters, such as RBS's future economicresults, business plans and strategies, and are based upon the currentexpectations of the directors. They are subject to a number of risks anduncertainties that might cause actual results and events to differ materiallyfrom the expectations expressed in the forward-looking statements.Forward-looking statements include, without limitation, statements typicallycontaining words such as "intends", "expects", "anticipates", "targets","plans", "estimates" and words of similar import. Factors that could cause orcontribute to differences in current expectations include, but are not limitedto, legislative, fiscal and regulatory developments, competitive conditions,technological developments, exchange rate fluctuations and general economicconditions. These factors, risks and uncertainties are discussed in RBS's SECfilings, including, but not limited to, RBS's Reports on Form 6-K containingthis announcement and certain sections of RBS's Annual Reports on Form 20-F.Information in this announcement of the price at which investments have beenbought or sold in the past or the yield on investments cannot be relied upon asa guide to future performance. RBS assumes no responsibility to update any ofthe forward-looking statements contained in this announcement, whether as aresult of new information, future events or otherwise, except to the extentlegally required. -------------------------- * The market consensus forecast, excluding ABN AMRO, is for 2007 profit beforetax, purchased intangibles amortisation and integration costs of £9,775 million,and for adjusted earnings per share of 70.5p. ** Adjusted for gains on major disposals, restructuring charges/releases, theprovision for the DoJ investigation, transaction-related advisory fees, breakfee paid to Barclays, change of control costs, and excluding the 4th quarterprofit contribution of LaSalle. For further details of the adjustments pleaserefer to the ABN AMRO first half 2007 results press release of 30 July 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
RBS.L