Royal Bank of Scotland Group plc (RBS) Ord GBP1
HL comment (14 February 2020)
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.
The shares fell 5.7% 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 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 and is earmarked for further remedial work at great expense.
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 almost £4bn 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 6%, 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. Unfortunately we're not all that much clearer on where the bank's priorities lie.
Full Year Results
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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