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RBS - Tough quarter and troubles ahead

Nicholas Hyett | 26 April 2019 | A A A
RBS - Tough quarter and troubles ahead

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NatWest Group plc Ord GBP1

Sell: 259.70 | Buy: 259.90 | Change -1.90 (-0.73%)
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RBS' first quarter operating profits fell 16.5% to £1bn, as total income fell by 8%. The poor performance was driven largely by the poor performance of RBS' small investment banking business, with weakness in the business bank as well.

The outlook for the full year remains unchanged, although the bank sounded a note of caution over the potential for Brexit to cause disruption.

The shares fell 4.6% in early trading.

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Our view

Ross McEwan is bowing out having ticked off all three things on his to do list. Fines relating to the financial crisis are settled, the government has begun selling down its stake and RBS has paid its first dividend since 2008.

Stripping the bank back to a few core businesses has been painful and expensive. But the end is finally in sight. The bank that's emerging is looking increasingly healthy, even if it's not quite out of the woods.

The troublesome 'bad-bank' has been wrapped up, freeing reserves and bolstering the bank's capitalisation. Costs are coming down, and loans to customers continue to grow.

Low interest rates and a competitive mortgage market are hampering net interest margins (the difference between what the bank pays out on deposits and charges on loans), but also mean bad debts have stayed low.

The settlement with the DoJ means RBS' most significant pre-crisis misdemeanours have been put to bed - and the bank can set its sights firmly on the future.

The immediate task facing McEwan's successor will be unwinding the government's 62% shareholding. RBS can now buy back up to 4.99% of that every 12 months if the government's a willing seller. However with an average purchase price of just over £5 a share, the government may hold off on more sales for a while.

The good news is the bank has a massive capital surplus. The Common Equity Tier 1 (CET1) ratio, a key measure of banking capitalisation, is £5bn or so above target. And RBS is generating more all the time.

That's seen the group return to paying dividends in some style - with a prospective yield of 5.3%, although as ever that's not guaranteed. It's also got the firepower to max out its buyback from the government over the next couple of years, should it choose to do so.

There are gripes of course, not least a fall in interest income. There's the potential for a Brexit shaped spanner in the works too, and sorting out the shareholder register is no easy task. Still we think there's more to like than worry about at RBS at the moment - and it's first time we've been able to say that in some time.

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First Quarter Results

Net interest income of £2bn was 5.3% below the same period last year. That's despite a small increase in loans, as net interest margins (the difference between what the bank earns on loans and pays on deposits) declined to 2.07%.

Non-interest income fell 13.1% to £1bn, largely because of reduced activity in NatWest Markets.

Lower group income meant the bank's cost to income ratio deteriorated to 63.4% (18Q1: 60.5%) despite total operating costs falling. Despite a small increase impairments for bad loans remain low.

The bank finished the period with a CET1 ratio (a key measure of banking capitalisation) of 16.2%.

CEO Ross McEwan announced that he would be stepping down earlier this week.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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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