The threat of massive impairments following the Covid-19 crisis means that Royal Bank of Scotland Group (LSE: RBS) is one FTSE 100 share I’d avoid at all costs.
RBS — or Natwest Group, as it’s soon to be remonikered — is one of the most sensitive to economic crashes. Revenues can slump and bad loans balloon at the drop of a hat. Therefore, the emergence of the coronavirus and subsequent expectations of a ‘Greater Depression’ bodes ill for the entire global banking sector.
Bad news for Barclays
Results from FTSE 100 rival Barclays (LSE: BARC) today illustrate the pressure these firms are facing. Pre-tax profits sank 38% between January and March, to £913m, as it swallowed £2.1bn of credit impairment charges related to the coronavirus outbreak. Expect the total to keep ticking higher as the true economic cost of the pandemic becomes clearer too, I say.
Bad loans are only part of the problem facing RBS et al though. Low interest rates have been a constant profits squeezer since the 2008/2009 banking crisis. The Bank of England’s decision to reduce the benchmark to new lows of 0.1% last month will have caused fresh stress. Barclays estimates its own profits will take a hit of £250m following this new action.
Moreover, Barclays also said recent government action concerning fees and overdrafts to help struggling Britons would cost it £150m. Increased customer support would create a £100m hit. And reduced balances at Barclaycard would dent interest-related earnings too, a reflection of slumping consumer spending activity in response to social and economic uncertainty.
A threatened FTSE 100 share
It’s no shock to see City analysts slashing their earnings forecasts for Britain’s banks left, right, and centre then. Recent revisions for RBS now suggest the industry giant will record losses per share in 2020.
At this stage it would be a tad cavalier to expect a roaring bottom-line bounceback next year too. It’s hoped the UK economy will start to fire again after lockdowns recently put it in the deep freeze.
But signs of a spike in infections following unwound quarantine measures, or following the onset of colder weather later in 2020, could cause serious ramifications for the Footsie firm and its profits beyond the near term. And these are very real possibilities.
On top of this, the prospect of a no-deal Brexit transpiring at the end of this year casts a further shadow over the banks, not just for 2020 but across the whole of the new decade. Political and economic uncertainty has hampered the performance of RBS in recent years, as has the subsequent need for interest rates to be kept at rock bottom.
There’s clearly a lot for RBS and its shareholders to worry about then. The FTSE 100 bank has seen its share price crumble 52% since the start of the year. It’s down by exactly two-third during the past five years too. And there’s clearly no reason to expect it to break out of this long-running downtrend either. This is a blue-chip I think should be avoided at all costs.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.