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RBS: Q1 - The sting in the tail

Steve Clayton | 29 April 2016 | A A A
RBS: Q1 - The sting in the tail

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NatWest Group plc Ord GBP1

Sell: 261.80 | Buy: 262.00 | Change 5.30 (2.07%)
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The UK focussed banks have been among the hardest fallers following the vote to leave the EU. Exactly what Brexit will mean for UK banks remains unclear, but there are a number of concerns that have driven prices down, which we have looked in more detail in our latest article 'Why are the banks suffering the most from Brexit?'

Given the recent market reaction all eyes will be on the banks' next set of results. Half year results are expected on 5 August, when we should get a better idea of exactly what the Bank thinks Thursday's vote means for them.

29 April 2016:

Some of the numbers in the RBS Q1 statement will be well received by the market. But many of the words will not. The core Personal and Business Banking (PBB) division delivered a profit of £531m, 9% down on last year, whilst Commercial & Private Banking (CPB) generated £483m of operating profits, far ahead of the prior year's £227m result. Corporate and Investment Banking (CIB) was never going to be pretty, but in fact, the loss of £54m was a halving from the £112m loss in 2015.

Capital Resolution lost £377m, which had been well flagged, and there will be more losses in the remainder of the year, and next, as RBS reverses out of its most ill-judged historic positions. Williams & Glyn made a profit of £101m, up 25%. But then as usual comes the slew of Other Items. The shares were little moved by the results.

At the adjusted, "before bad stuff" level, RBS reports an overall profit of £421m, but after those Other Items, we end up with a statutory loss of £968m, largely due to a charge of £1.2bn, paid to the UK Government for exiting the Dividend Access Share mechanism that was set up as part of the rescue package when RBS was heading for the rocks.

RBS say they are making good progress with their plans to simplify and strengthen their core businesses. Capital ratios are strong, with a Common Equity Tier 1 ratio of 14.6% the highest we have seen so far in the reporting season. But the sting in the tail is at the end of the statement; RBS warn that substantial additional provisions will need to be made to cover litigation relating to their historic US Mortgage market activities. They also confirm that their plans to separate Williams & Glyn are running awry.

RBS must split W&G out, as part of the settlement made with the EU, for receiving State Aid when RBS was rescued, and it is mandated to happen by the end of next year at the latest. RBS now say that they see a significant risk this may not be achieved on time, because of the difficulties of building a new platform for W&Gs operations and the complexities of their product and customer mix. The overall financial impact on RBS is now likely to be significantly greater than RBS had previously estimated.

Beyond that, RBS expect income in their core businesses to be broadly stable for the rest of the year; their balance sheet is growing as they raise lending activity, especially in mortgages. They are on track to cut £800m of costs this year, having taken £189m off the cost base in Q1. Bad debts are seen as modest, with most of the charge in the quarter related to their shipping portfolio. Around a billion pounds of restructuring costs will be borne this year and most of the expected £1.5bn of disposal losses in the Capital Resolution portfolio will be felt this year.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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