RBS back under pressure after poor quarter

by Richard Hunter from interactive investor |

It's only one quarter, but the memory of today's poor results from RBS may take a while to erase.

It is something of a saving grace that The Royal Bank of Scotland (LSE:RBS) had delivered a strong performance in the first half of the year, since there is little doubt that the third quarter was disappointing on any number of fronts.
The previously guided, but additional PPI charge of £900 million has done much of the damage, although at last the line has been drawn in the sand.

Elsewhere, both Net Interest Income and Net Interest margin reduced against a backdrop of historically low interest rates, the cost income ratio spiked to 93% undoing some of the progress made hitherto and the PPI provision also put a slight dent in the capital cushion, which fell to 15.7%.

Total income was 20% lower year-on-year (and 29% lower quarter-on quarter), with NatWest Markets having had a particularly challenging time in the midst of market volatility. There was also a reduced Return on Tangible Equity, and a net impairment loss of over £200 million flashes an additional warning sign.
Not all of the positive momentum from the half-year numbers has evaporated though, and it remains to be seen whether this quarter is more of an anomaly than a trend.

The full year target of £300 million cost savings remains on track, the bank has experienced net lending growth and, despite the third quarter loss, in the nine months of the year so far RBS is comfortably ahead in terms of pre-tax profit at £2.7 billion, albeit slightly shy of the previous year.

Meanwhile, the group has reiterated its full-year guidance, which should at least provide some solace. The bank's recent ability to generate cash, as evidenced by the previous special dividend, has led to a yield of around 6%, with hopes of further distributions to come, either in the form of additional specials and/or share buyback programmes.
From a wider perspective, the government stake in the bank remains an overhang on the stock, while the ongoing uncertainty on negotiations with Europe is another drag, as is the case with Lloyds Banking Group (LSE:LLOY).

That being said, perceived progress in those talks has led to something of a "Brexit bounce" for the shares, which have risen 12% over the last month.
The performance further out has been rather less positive, however. A 6.5% decline over the last six months has dragged on performance over the last year, where the shares have added just 0.4%, as compared to a gain of 4.3% for the wider FTSE 100 index.

The market consensus of the shares, recently shaved to a cautious buy, may find itself under further pressure until such time as RBS can erase the memory of this quarter.

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