RBS reported an operating loss of £8m in the third quarter, versus a £961m profit last year. That largely reflects a £900m charge relating to PPI. However, excluding the PPI headwind, and various other exceptional costs, the bank would have reported an operating profit of £1bn - still well behind market expectations.
The poor underlying performance reflects a weak result from the investment bank, NatWest Markets, as well as a competitive mortgage market and unfavourable interest rate environment.
The shares fell 3% in early trading.
RBS has done a lot of good work recently. Fines relating to the financial crisis are largely settled, the government has begun selling down its stake and the bank has paid its first dividend since 2008 - with a chunky special dividend at the half year thrown in as an extra sweetener.
But for all the progress, RBS faces some major challenges over the next twelve months or so. 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), and banks appear to be cutting interest rates to win new business.
Should a no-deal Brexit result in an economic slowdown, the combination of lower net interest margins (the difference between what the bank charges on loans and pays on deposits), falling demand for new borrowing and rising bad loans would be pretty unpleasant for profits.
Cost cutting efforts should provide some insulation against a struggling top line. But unfortunately, that's proving easier said than done, and peers aren't standing still on that front either. It doesn't help that the investment banking division is proving something of a liability.
Adding to the challenges facing the new CEO, is the need to unwind 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.
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 £3.2bn or so above target. That underpins the special dividend, and if the economy escapes Brexit unscathed will support increased loans-to-customers going forwards.
That's seen the group return to paying dividends in some style - with a prospective yield of 7.4%, although as ever that's not guaranteed. Whether the bank's got the firepower to grow, pay the dividend and max out its buyback from the government, all at the same time is another question. Exactly what tops the new CEO's list of priorities will hopefully be clearer after February's full year results.
Third quarter results
Net interest income fell 6.9% year-on-year to £2bn, despite an increase in loans to customers, as a competitive mortgage market meant net interest margins fell to 1.97%. Non-interest income fell 38.1% to £909m, reflecting tough condition in NatWest Markets.
Operating expenses rose 10.5%, largely down to the increased PPI cost, with underlying operating expenses actually falling slightly. RBS reported a cost:income ratio of 92.9%, a significant deterioration on the previous quarter. Loan impairments fell 11.3% to £213m, although came in slightly worse than market expectations.
The bank's Common Equity Tier 1 (CET1) capital ratio, a key measure of banking capitalisation, fell to 15.7% due to a combination of PPI expenses and an increase in risk weighted assets.
Excluding the PPI charge, RBS reported a 7% return on tangible equity during the quarter.
Guidance for this year and next remains unchanged.
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