Regular readers will know of my longstanding fears for the FTSE 100’s UK-focused banks like Royal Bank of Scotland Group (LSE: RBS), thanks to the destructive impact that Brexit is already having on the economic landscape.
My formerly bullish take on the sector, that includes the likes of Lloyds and Barclays, was thrown immediately out of the window in the wake of June 2016’s referendum. Unfortunately, my sentiment hasn’t improved one iota since then. Rather, the political stalemate between Westminster and Brussels over the terms of departure, with less than six months to go before Britain’s planned departure date, makes me more worried than ever.
The share slump that’s befallen RBS over the past six months illustrates the firm’s rising risk profile in this climate. And the bank’s chief executive Ross McEwan laid bare the extent of the stormclouds facing the UK economy when he recently told the BBC: “We are assuming 1% to 1.5% growth for next year. But if we get a bad Brexit then that could be zero or negative, and that would affect our profitability and our share price.”
McEwan said that the bank has already began restricting lending to some sectors, more specifically to retail and construction. He added that, with many companies also adopting a ‘wait and see’ approach concerning Brexit, that RBS’s loans to large businesses were down around 2% so far this year.
On the slide
RBS’s warnings are particularly chilling as the odds of Britain tumbling out of the EU without a deal continue to grow. There’s obviously plenty more scope for the bank’s share price to drop in the months ahead, and quite probably thereafter.
Indeed, some city brokers have been busy cutting their 2019 earnings forecasts for RBS over the past few months, and more could just be around the corner. And so while a forward P/E ratio of 9.2 times may be cheap, I’m still not considering buying the business today. Instead, I’d be selling the shares if I had any in the bruised bank.
Another one to sell
I also remain less than compelled by Sirius Minerals (LSE: SXX) right now. The uncertainty over the financing and timescales concerning its Woodsmith Mine on the North Yorkshire Moors has made it a gamble too far in my opinion. Recent news surrounding the development of the project has only exacerbated my nervousness.
Since I last covered the share, the polyhalite play announced that the costs of getting its monster project online have swelled by $463m after it revisited plans for the 23-mile tunnel that will link the mine to the English coastline to export the material. As a consequence, total estimated costs for the mine have swelled to $3.7bn.
As if this wasn’t problem enough, while Sirius maintains that first output will come to pass in 2021, because of expected financing issues further down the line, it has also reined in its capacity expansion estimates. It now expects to hit its 13m and 20m tonnes per annum targets in 2026 and 2029, respectively.
There’s still a long way to go until Sirius becomes a revenues-creating entity, so there remains plenty of room for its balance sheet to come under added strain in the months and years ahead. I’d be happy to sell out of the business today and buy something much less risky.
