Company Overview
Royal Bank of Scotland Group Plc  (RBS) provides financial products and services to the customers in the UK and Abroad markets. RBS holds brands such as Coutts, NatWest, Holt's Child & Co., Lombard, etc. under its name and few are even older than the Royal Bank itself. The company's operations are differentiated in four operating segments: Personal & Business Banking (PBB), Commercial & Private Banking (CPB), RBS International (RBSI), and NatWest Markets. Harris Associates LP, Norges Bank Investment Management and Artisan Partners LP are the major shareholders in the bank. (Source: Thomson Reuters).

Financial Highlights (H1 FY 2019, in £m)

Source: Company filing

Despite lower central treasury income in the first half of 2019, the lender’s total income surged by 6.2% or GBP 415 millionto GBP 7,117m H1 FY 2019. Net interest income reduced by 7% as net interest margin was 2.04%, which was 9bps lower than the year-ago period. Other expenses reduced by GBP 173 million during the period under consideration against the H1 2018. In the H1 FY19 period, operating expenses of the lender decreased by GBP 635 million, or 13.4%, to GBP 4,100m. The bank recorded an operating profit of GBP 2,694 million in the period under review,representing a surge of 48% over the year as the operating expenses reduced considerably. An attributable profit (common shareholders) of GBP 2,038 million was recorded in the first-half of the 2019, and basic earnings per share stood at 16.9p. Return on tangible equity was 12.1% for the first half of the 2019, and Capital Equity Ratio (CET1) was at 16.0%, with cost/income ratio of 57.2%.

Stock Performance

Daily price chart (as on August 06, 2019), after the market closed. (Source: Thomson Reuters)

On August-06-19, shares of RBS closed at GBX 200.8 and added approximately 1.69% in day's session. In the year-ago period, shares of the company have registered a 52w high of GBX 266.44 and a 52w low of GBX 194.44 respectively. At the current trading level, the dividend yield of the company stood at 2.79%.

Valuation Methodology


Conclusion
In quarters to come, RBS is well placed to reduce its costs and recently did a lot of good work. The bank has also paid its first dividend of 5p per share along with a special dividend of 12pence per share since the 2008 financial crisis in the first half of 2019.

Also, the lender has a humungous capital surplus, and TIER 1 risk-adjusted capital ratio of the bank stood at 18.2%, which is well above the regulatory target and substantially above the industry average of 14.45% recorded in the first half of 2019.

In the first half of 2019, the lender recorded a loan book growth of 1.4%, whereas industry average stood at 1.0% and deposits during the H1FY19 grew by 1.1% against the average industry growth of 1%. RBS recorded decent growth in advances and deposits, even though it went through many turmoils during the period under consideration.

Therefore, based on the decent future outlook backed by strong capital surplus and valuation done using the above methodology, we have given a "Hold" recommendation, at the closing price of GBX 197.45 (as on August 05, 2019), based on the 7.55x NTM Peers Median Price-to-Earnings Multiple (approx.) on the FY19E Earnings Per Share (approx.)

*All forecasted figures have been taken from the Thomson Reuters.

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