Just when you thought the big FTSE 100 banks were finally escaping the fallout from the financial crisis, they have slipped into reverse.
Going backwards
Yesterday, it was the turn of Barclays to retreat, posting a 12% drop in first-quarter profits to £1.5bn. Its share price fell 2% as a result. Today, it is Royal Bank of Scotland Group (LSE: RBS), which has just issued a disappointing first-quarter date just one day after chief executive Ross McEwan surprised investors by announcing he was stepping down after five years.
RBS is down 3% after posting a 16.5% year-on-year drop in operating profit before tax to £1.01bn, down from £1.21bn in the first quarter of 2018.
The drop primarily reflects £265m lower income, partially offset by a £73m cut in operating expenses. Total income fell almost 8% from £3.3bn to £3.04bn. First-quarter profit attributable to shareholders fell to £707m, down 12.5% from £808m a year ago.
Margin call
Just like Barclays yesterday, RBS has posted a drop in net interest margins, from 2.14% to 2.07% (against 3.27% to 3.18% at Barclays), as the low interest rate environment continues to take its toll. Return on tangible equity also fell, from 9.4% to 8.3%.
There were some successes, with net loans to customers up £1.7bn compared to the final quarter of 2018, due to strong gross new mortgage lending and lower redemptions. That was a quarterly rise of 1.1%, or 3.2% year-on-year.
RBS said it remains on track to meet its £300m cost reduction target this year, achieving a £45m reduction in the quarter. Peter Stephens has a bullish view on the bank’s long-prospects.
Brexit again
Today’s report also contained the now mandatory reminder about ongoing Brexit uncertainty, which is delaying business borrowing decisions and “is likely to make income growth more challenging in the near term”.
Income in its NatWest Markets division fell more than 40% to £256m, while last year’s quarterly operating profit of £97m transformed into an operating loss of £62m.
Still, at least RBS is making a profit and £1.5bn in three months is not to be sneezed at, especially with Brexit casting a dull cloud over the domestic economy (while also being a handy scapegoat).
At least it’s cheap
The bank has come a long way, and still has a long road ahead of it. That is reflected in its temptingly low valuation of 8.8 times forecast earnings, and a price-to-book ratio of just 0.7.
Better still, the dividend is back. Today’s forecast yield of 1.4% is predicted to hit 5% this year, and 6.5% in 2020. That’s the real prize here. Who knows, we might even have a Brexit resolution by then, which would give the banking sector a real lift, but don’t hold your breath. A global recession could quickly slap it back down again.
Long-term play
Departing boss McEwan made RBS profitable in 2017, after nine consecutive loss-making years, and will be there for another 12 months while the bank finds a replacement. The Government still has a 62% stake, which shows that RBS remains damaged goods.
Some have suggested today’s report is softening investors for a profit warning later this year. That might be the time to buy.
