Following a request from the Bank of England RBS has cancelled all returns to shareholders until the end of this year, including dividends and share buybacks. This includes the fourth quarter and special dividends for 2019.
The move increases RBS' CET1 ratio, a key measure of banking capitalisation, of 16.2% at the end of 2019 by 0.74 percentage points.
Alongside the announcement RBS CEO Alison Rose said "The Board remains committed to capital returns, will continue to review the situation and will look to resume distributions to ordinary shareholders in due course."
The shares fell 4.7% in early trading.
The news that RBS, along with the other major UK banks, is suspending shareholder returns doesn't come as a surprise.
The government and Bank of England (BoE) have taken drastic action to free up banks' capital and encourage lending to smaller businesses. Paying out surplus capital to shareholders in that environment was never going to go down well, and the BoE has (to all intents and purposes) instructed banks to scrap any dividends until next year.
But preserving capital may be no bad thing. The months ahead look set to be tough for the sector.
We've already seen several companies file for bankruptcy, and as the lockdown drags on we expect to see more. That means a rise in loan defaults which will eat into the bank's profits and ultimately capital. Widespread uptake of mortgage holidays and debt relief would also reduce cash coming through the door.
Even financially sound businesses will be leaning heavily on their bankers in the months to come. As many businesses see sales fall to near zero, borrowing is the only way to meet expenses and that means drawing on existing loan facilities and looking for new ones. Banks' key capital ratios are calculated by dividing available capital by 'risk weighted assets' or 'RWAs'. As loans to customers increase, RWAs increase and capital ratios fall (even if available capital remains unchanged).
RBS was already struggling with the low interest rate environment. But the move by the BoE to cut rates to just 0.1% in March (a record low) will make matters worse. The lower interest rate will largely be passed onto borrowers thanks to a combination of base rate tracking loans, competition and regulatory action. But the interest banks pay to savers is already on the floor. With little room to push funding costs lower the net interest margin (the difference between what the bank can make on loans and pays for funding) will be squeezed. That will significantly reduce the profitability of loans.
It's not at all the start RBS's recently installed CEO Alison Rose would have wanted.
She had been targeting significant efficiencies, especially through digitisation and rationalising the arguably sub-scale investment bank. However, both projects are expensive, and whether they can be delivered in the new environment remains to be seen. If cost savings slow and income is under pressure then it's difficult to see how RBS can thrive.
It doesn't help that while high street banking accounts for a sizeable chunk of RBS's activity, the bank's notable for its sizeable SME business. Despite government support smaller companies will be hit hard by the current lockdowns, and we wouldn't be surprised to see bad loans spike significantly.
The bank's saving grace is that prior to the coronavirus outbreak it was practically overflowing with capital, with a significantly higher CET1 ratio than peers. That should allow it to weather a spell of poor results and also fund loan growth as customers seek to access emergency cash.
Our longer term concerns about profitability haven't gone away. But a strong capital position means RBS could emerge from the current crisis in better shape than rivals, with a larger loan book, stronger balance sheet and potential for a faster return to dividends. However, even for RBS that depends on the length of the lockdowns and strength of the recovery - and that's an unknown.
Full Year Results
Underlying total income rose 6.3% to £14.3bn, however that reflects significant foreign currency gains. Excluding this, and other exceptional items, income came in at £12.1bn, slightly ahead of expectations. Lower costs meant underlying operating profits came in at £3.5bn comfortably ahead of analyst expectations.
The bank announced a final dividend of 3p per share, with a 5p special dividend. That takes the dividend for the year as a whole to 22p.
The bank also announced that it would be renaming itself NatWest Group.
Net interest income fell 7% year-on-year to £8.0bn, as lower net interest margins (the difference between what the bank charges on loans and pays to borrow, currently 2.47%) offset an increase in loans to customers. Loan growth was particularly strong in UK Personal Banking where both mortgages and unsecured lending increased.
Non-interest income rose 12.8% to £5.3bn. However that was boosted by significant currency gains without which net interest would have been down year-on-year.
Underlying operating costs fell 4.2% to £7.0bn, while increased restructuring costs more or less offset lower litigation and conduct costs. Impairments for bad loans rose 74.9% to £696m, which the bank described as moving towards a "more normalised external credit environment".
The bank finished the year with a CET1 ratio of 16.2%, in line with last year despite increased dividend payments to shareholders.
Return on equity for the full year came in at 4.7% on an underlying basis, although RBS continues to target 9-11% in the medium term. The bank said that it expected "challenges to income" next year, although it continues to target cost savings and lending growth.
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