Royal Bank of Scotland saw total income in the first quarter rise 4.1% year-on-year to $3.2bn, better than the market had expected. That was driven by a 21.5% rise in non-interest income, including valuation adjustments based on changes in the valuation of the banks own debt, offset by weaker income from lending.
A £802m provision for bad loans (credit impairments) meant profits fell 58.5% to £331m. Without this charge operating profits would have risen 20.2%.
Any decisions on future dividends will be deferred until the end of 2020.
The shares rose 3.4% in early trading.
Given it went into the crisis loaded with capital, RBS might feel the pressure from regulators to cancel its dividends is a bit unfair. Despite a spike in commercial lending and a hefty provision for defaults the group is even better capitalised now than at the start of the year.
Having said that, a bit of caution probably doesn't go amiss in the current environment.
RBS generates a higher proportion of revenues from interest payments than rival Barclays and that makes the recent cut to base rates painful. It doesn't help that the high street bank is 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 further provisions for bad loans if economic conditions deteriorate.
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 while there have been some early signs of success, whether further progress 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 in the short term.
However, investing is a long term game and a balance sheet that's practically overflowing with capital should allow RBS to weather a spell of poor results and also fund loan growth.
Our pre-crisis 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, that still depends on the length of the lockdowns and strength of the recovery - and that's a big unknown.
First Quarter Results
Net interest income fell 4.5% in the first quarter to £1.9bn. That reflects a decline in the bank's net interest margin (the difference between what the bank charges on loans and pays for funding) to 2.28% (2019:2.62%), which more than offset a 14.7% increase in loans to customers. The decline reflects a lower Bank of England base rate and was spread across all divisions.
Other income benefited from a £155m technical boost from changes in the valuation of the group's own debt. Excluding this movement non-interest income rose 1.7% to £1.1bn, with a good result from investment bank NatWest Markets mostly offset by weakness elsewhere, particularly Private Banking.
Operating costs fell 5% year-on-year as strategic, operating and litigation costs all fell. Credit impairments largely reflect the increased uncertainty created by coronavirus, with commercial banking seeing the biggest increase in impairments.
The bank finished the quarter with a CET1 ratio of 16.6%, 0.4 percentage points higher than at the start of the year. This largely reflects the cancellation of the 2019 final dividend, as increased lending meant RWAs increased.
Given the current economic uncertainty the bank has not given detailed guidance for the current financial year or updated medium term guidance.
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