Why Dividend Resumption At Royal Bank of Scotland Group plc May Be A Fairytale

Today I am looking at why I believe Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) may disappoint dividend hunters.RBS

Stress testing set to intensify

At first glance, Royal Bank of Scotland’s successful hurdling of the European Central Bank’s stress tests at the weekend are obviously reason for cheer. But once you burrow down into the numbers the results are less than convincing.

Indeed, Royal Bank of Scotland’s common equity tier 1 (CET1) ratio clocked in at 6.7%, making it the second worst capitalised bank in Britain behind Lloyds Banking Group. Of course a pass is a pass, and Royal Bank of Scotland beat the ECB’s 5.5% target, but the outcome is hardly outstanding — by comparison HSBC ran in with a reading of 9.3%.

And the bank still has to face the Bank of England’s own set of assessments scheduled for December, which are viewed by many as a harder proposition that the ECB’s tests — ‘The Old Lady of Threadneedle Street’ will assume a 35% collapse in domestic house prices, for example. Royal Bank of Scotland holds a 10% market share in the British mortgage market.

A multitude of headwinds hinder payout possibilities

Given its precarious capital position, income hunters will of course be seeking clues over whether this will delay the resumption of its dividend policy.

City analysts expect Royal Bank of Scotland to get dividends rolling again from next year, giving some reason for cheer, with a total dividend of 1.6p per share presently chalked in. Although this currently yields only 0.4%, some way behind a forward average of 3.4% for the complete banking sector, any sort of payment is still a step in the right direction.

But I don’t believe that shareholders should bet their house on this occurring. On top of its less-than-robust capital position, Royal Bank of Scotland still faces mammoth financial penalties relating to a string of previous misdemeanours, from the mis-selling of payment protection insurance (PPI) and interest rate swaps through to the manipulation of currency markets.

Although chief executive Ross McEwan is aiming to put the worst of the bank’s legacy issues behind it within the next 18 months, the scale of the firm’s misconduct and therefore timing of this goal is nigh on impossible to quantify, a situation which could weigh heavily on the firm’s dividend outlook.

And with revenues at the core still continuing to struggle — total income fell 6% during January-June to £10bn — Royal Bank of Scotland may struggle to get its planned dividend resurrection off the ground.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.