Admittedly, I've struggled to reconcile this reported underlying post-tax RoTE figure of 10.4% to any earnings figures disclosed in the accounts?
So have I, indeed, but I think I’ve finally got it. Here it goes:
Underlying RoTE = [Underlying Profit After Tax]/[Tangible Equity minus AT1 Capital]
where [Underlying Profit After Tax] is calculated from [Underlying Profit Before Tax] adjusted by the Normalised Tax Rate of 19% (corresponding to the UK flat Corporate Tax Rate) minus AT1 Distributions (grossed up at the Normalised Tax Rate).
So, we have the following:
Underlying Profit Before Tax (annualised) = 286.0m*2 = 572.0m GBP
Normalised Tax = 19%*572m = 108.7m GBP
AT1 Distributions (annualised + grossed up @ 19%) = 12m*2/(1-19%) = 29.6m GBP
Underlying Profit After Tax = 572.0m-108.7m-29.6m= 433.7m GBP
Total Equity = 5,358.0m GBP
Intangibles = 495.0m GBP
AT1 Capital = 697.0m GBP
Tangible Equity minus AT1 Capital = 5,358.0m-495.0m-697.0m = 4,166.0m GBP
Therefore:
Underlying RoTE = 433.7m/4,166.0m = 10.4%
In particular, it is not necessary to adjust for Minority Interests, because the adjustments would have to be made both at the numerator and at the denominator, hence cancelling each other out; in other words, the percentage return is independent of minority interests, which makes conceptually sense (thus, the pre-tax return calculation in my previous post was incorrect).
In any event, the statutory RoTE is aimed at >12% from FY22, and based on my observation of management's performance to date (on items within their control), I rate this as a reasonable target to model for the longer term return on our tangible equity
I agree with you, provided that:
a) The realisation of synergies and cost savings proceeds broadly according to plan
b) NIM does not compress too much from its current levels, as a consequence of the ongoing tightening in mortgage rates
c) Current provisions for bad loans, PPI settlements, etc. are broadly reflective of future realised losses
Of course, a successful implementation of a) could potentially largely compensate for sub-par outcomes in b) and c).
Cheers
