If you’re concerned about the investment outlook for 2019 then you’re certainly not alone.
The biggest elephant in the room facing all glass-half-full investors, brokers and market commentators is considering how Britain’s EU withdrawal will unfold in the coming months, something that will have significant implications for economies all over Europe for decades to come.
A hard Brexit, a half-in, half-out fudge, or no exit at all are all up for grabs in 2019. And this clearly leaves a lot of uncertainty for banks focused primarily on the domestic retail market like Royal Bank of Scotland Group (LSE: RBS).
Indeed, in a disappointing third-quarter trading statement released last month, RBS announced that it had swallowed a £100m impairment in reflection of “the more uncertain economic outlook” right now. And further charges could be due in the months ahead.
Toughening conditions
Chief executive of the business Ross McEwan has been happier to lay bare his thoughts on Brexit and its possible consequences than any of his contemporaries. And reflecting his cautious approach, RBS in October announced that it has trebled the amount it has set aside to help small- and medium-sized companies navigate Britain’s EU departure, to £3bn.
It announced a package of £1bn just five months earlier, indicating how the risks to the UK economy have grown since the spring.
In response to these toughening conditions, City brokers have been downgrading their earnings estimates for RBS, and a bottom-line rise of just 11% is now predicted in the wake of October’s poor trading statement.
Things are even worse for 2019 though, and a 1% profits drop is now expected by the number crunchers. And clearly, further negative estimate revisions cannot be ruled out given the fragile and fluid state of Brexit negotiations.
Reflecting this increasingly bearish situation, RBS’s share price slipped to two-year lows last week, meaning that the business now carries a forward P/E ratio of 8 times. This isn’t enough to tempt me, particularly as the tough market conditions exacerbate the stress on the bank’s already-pressured balance sheet.
Will dividends disappoint?
According to the European Banking Authority’s financial health check of the banking sector, RBS came out with a capital ratio of 9.5% under so-called adverse conditions. This passed the regulator’s minimum requirements, but not by much.
And things could be even closer when the Bank of England releases the results of its own annual check later this week, a situation that would put hopes of ripping dividend growth at the bank under the cosh.
Right now, city analysts are expecting a 6.5p per share payout at RBS for 2018, resulting in a decent 2.9% yield. And things get even tastier for next year, an anticipated 12.9p dividend shoving the yield to a mighty 5.7%. That weakness on the balance sheet, as well as its worsening profits outlook, mean I think the chances of such abundant dividend hikes are receding fast.
In my opinion, investors should ignore RBS’s low valuation and big yields. It’s cheap for a reason and I expect its share price to continue sinking in 2019 and quite possibly well beyond that.
