RBS Executive Insights: Non-Core Rundown, Coverage Ratios

On Friday, Royal Bank of Scotland Group PLC ADR (NYSE:RBS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Non-Core Rundown

Andrew Coombs – Citigroup: I have two questions, please, one on the Non-Core rundown and then one on the margin. The one Non-Core comes in two parts. So firstly, can you perhaps elaborate on the positions that were reduced during the first quarter, because I noticed that you’ve had GBP11 billion reduction in Non-Core assets to GBP83 billion, but only a GBP3 billion reduction in RWAs to GBP90 billion? So I’ll be interested to know if it is the case of selling that or disposing of lower risk-weighted assets there. Also, in terms of the Aviation Capital and its statement on Page 11, so presumably the GBP5 billion is not incorporated in the GBP11 billion that has been achieved. Maybe (indiscernible) understanding that, but I will be interested to know what your thoughts are on full year target, because you have got a target of 65 to 70, if you look at the 83, where you already are today, takeoff in ’05 you already at 78 to somewhat I’ll give you that’s not that ambitious to know what’s been achieved already. So, just want to understand that’s conservatives on your behalf or perhaps a reflection of the assets remaining that’s my first and last question.

Bruce van Saun – Group Finance Director: So, look I think the reduction in Non-Core assets was pretty much across the board. There is a couple other little regulatory things that we went as offsets to the RWA reduction. It is true though that some of the assets that are market assets that came out through the commutation of our mono line exposures we were in good markets and we were able to liquidate some of those position. So, I think that’s probably why we ran a little bit ahead, but again, roughly half of the rundown was through natural runoff and the other half was through asset disposals. You are correct that the GBP5 billion in the aviation, GBP4.5 billion is still in assigned but not completed category and we have I think a fairly good pipeline of transaction that we’re working on. We don’t have anything that big really left and so, if you actually look at how we’re going to procedure from here, we probably have in excess of 80 data rooms opened and talking about lots of individual assets or small portfolios. But when we look at the stage of completion. So we feel quite confident of our ability to hit that target. Again, we are managing to a loss budget so provided that Core continues to deliver, we I think like to spend that full amount and if that means that we can end up below that targeted range for the year that would be a good outcome.

Andrew Coombs – Citigroup: The second question I have is just on your liquidity buffer that you flag on Slide 19 and 20. I mean, you’re now at a 191% of short-term wholesale funding, and if I look at the NSFRs its 109% as well, I know you don’t disclose the LDR, but just interested to know, is there any ability to deploy some of that GBP153 billion of liquidity buffer perhaps, post the Moody’s review. Also what’s baked into your NIM margin guidance of 189 basis points on that front as well?

Bruce van Saun – Group Finance Director: Yeah, well obviously, it is expensive to maintain liquidity at that level and I think the 1.9 measure is a little simplistic, because we run a scenario of stress tests that look at deposit outflows in addition to short-term wholesale funding outflows. So, as that short-term wholesale funding number comes down you kind of move out of the range, we had set a target of 1.5 to 1. I think you’d naturally move a little bit over that. Having said that, I think one of the reasons to keep the liq buffer where it is, you mentioned Moody’s, but just looking at the geopolitical environment, we face the Eurozone still in some distress. I think the number one priority here, is to make the bank safer and keep it safe through still rocky period. We did bring down the average liquidity in the quarter by about GBP8 billion, that’s helping to improve the NIM. I do think there will be opportunities as the year goes on, to continue to do more of that, but we’re going to be cautious until we see the environment improve.

Coverage Ratios

Jason Napier – Deutsche Bank: I had some questions around the disclosures on Page 104, if I may. Focusing on Ulster in the Core bank, first of all, commentary in your goal so far confirms fall in collateral values and then increase in our riyals. I just wonder when write-off amounts are so small, whether you could give some sort of color on what level of sort of realizations are taking place and perhaps what the inventory of repossessed properties looks like? It just strikes me that the market is so liquid that seeking out what the right coverage level is going to be a real challenge and so I wonder if whether you could just talk about properties and possession noting that I think in the quarter you said that half of the properties taken were voluntary surrenders or abandonment. So I just wonder whether you could just talk about how you figure out the right coverage ratios there, and I have another question after that.

Stephen Hester – Group Chief Executive: Yeah. I don’t have it on my finger tips the actual number I am afraid, but I having just been over the last week, so I’d just try and give you a bit more color. I think the reality is there is currently no material markets in real estate in Ireland in terms of investment transactions. It is for that reason that there is – it’s sort of a point that, that society is a provision and write things only down, because you’re not going to do anything different with them for the time being in any event. And so that’s why you have low levels of write-off. It doesn’t mean that they’re not going to get written off. Because there is so little evidence, you’re absolutely right to see it’s kind of meaningless to set a value. So the way we try to approach it is to take some through the cycle long-term average estimates of what things might be in the absence of any meaningful short-term market and frankly, I completely accept it’s a little bit like sticking a finger in the air, and our attempt will be to keep up provisions broadly in the pack, but in the end it will be what it will, we’ll only know in 10 years, what the losses are. I think that the key indicators to look at apart from real is obviously, is what’s going on in Irish economy and then what’s going on real estate prices. The slightly disappointingly retail prices, retail house prices have continued to residential house prices to comedown this year albeit at March was the first month that they didn’t whether that’s a blip or a trend to early to tell. On the other hand, the government seems to be doing the right thing, the economy seems to be flat as opposed to going down. Exports are still positive. So, I think, we are still feeling, it’s more likely the not — that provisions starts coming down this year and the economy gets better and obviously mathematically, our provision coverage get to a point where you’re caught up in any event. But, clearly that’s still a reason will bid off a spread for exactly where this thing ends.

Jason Napier – Deutsche Bank: On that sort of actions that the government are taking or looking and taking the three new methods of engaging in a non-judicial way on debt resolution and management. Have you seen any behavioral change ahead of that?

Stephen Hester – Group Chief Executive: I think, there has been some evidence of behavioral changes as some people speculated that it might be easier to get out of that debt in light of legislative change and so I think that some evidence of that, that said, I had a number of contacts with the government of Ireland as I say when I was over there and received pretty strong assurances that the regime that is due to go through parliament next three or four months will not be an unduly anti-business regime, for example, personnel insolvency periods will be three years against one year in the U.K. So, at the momentum, it feels like the legislative process is not going to lead to a chaotic situation for banks although there are some uncertainty until it’s complete.

Jason Napier – Deutsche Bank: Then if I may just on that same table. Is there something in particular going on in the International Banking numbers? I noticed your REILs have halved and coverage is nearly a 100%. Was that a specific instance and as they were in for write-backs there at all?

Bruce van Saun – Group Finance Director: No, I think that’s the old GBM portfolio, which is now the main asset portfolio in the Group and that’s going to move around a bit because those are large single-name exposures in that. So, I think that that portfolio has been performing reasonably well. We’ve had I think reasonably good credit performance and good coverage levels in that portfolio, but whether we have any near-term kind of recovery opportunity, I think it’s too early to tell. It kind of things hit you good or bad kind of in a big lump without a lot of foreknowledge.