LONDON -- RBS (LSE: RBS ) (NYSE: RBS ) , the troubled, state-owned bank, posted a nearly 6 billion-pound loss in 2012 -- nearly tripling the loss reported a year ago. Of course, that result included 2.2 billion pounds in charges related to PPI, LIBOR, and other improperly sold rate swaps as well as a non-cash charge of 4.6 billion pounds related to the value of the bank's own debt.
If one were to look at the underlying operations -- what the bank is calling its Core operations -- operating income was up almost 5%. This was thanks to improving profitability at RBS's U.S. operations and a relatively strong performance by the bank's Markets division (what some would call its investment banking operations).
Out with the good stuff
Interestingly, it has been rumoured that RBS is feeling pressure to offload its U.S. operations -- which operate under the name Citizens Financial Group -- and further reduce its investment banking activities in order to improve its capital situation and reduce exposure to riskier activities.
It is generally better to try to sell something that is making money rather than a loser, so this may be good news for RBS's efforts to raise capital, but it doesn't really help the prospects for investors as the remaining operations are struggling.
Down to the core
Looking at RBS's other Core operating businesses, only the wealth management division reported improved operating income in 2012. The U.K. Retail and Corporate lending businesses reported 6% and 7% declines in operating income, respectively, as falling interest margins -- the spread between what a bank pays for deposits and what it can earn for lending those deposits out -- outstripped cost savings and reduced provisions against loan losses.
More to come?
Despite its shares rallying 70% from last July, RBS is currently trading at just over half of book value, which is about a third of what it generally traded at in the years before the financial crisis and also lags the multiple for its closest peer Lloyds. However, that book value and historical multiples should be viewed with some cynicism.
RBS is still looking to dispose of at least 57 billion pounds in assets (it could be closer to £100 billion in the end) in order to achieve it ideal balance sheet, and under the new regulatory regime which will require higher capital reserves it is unlikely banks will be able to earn the returns they used to. RBS may look like a value play, but there is still a lot of uncertainty around the bank's future, and I suspect it will take a very patient investor to see the value realized.
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