RBS’s shaky quarter points to more cuts
Ken Odeluga October 24, 2019 6:26 AM
The largely rinsed-out PPI issue continued to linger in the third quarter with a £900m provision linked to compensation and other costs that was at the higher end of the range of expectations. The impact, which wiped out profits in the quarter leaving an $8m loss, is a reminder of how corrosive the twenty-year long saga has been, particularly to UK-focused RBS, which has 89% of its asset base in Britain. More broadly, on the basis of continued PPI ripples in RBS’s quarter, investors will need to reassess how much of an additional aftershock could be felt by other British lenders. Holders of shares in Lloyds, which reports next Thursday, may take RBS news as fair warning.
Yet efficiency has trumped PPI remediation as £27.5bn RBS’s main priority so far in the second half, as swap rates and the yield curve, not to mention Brexit, apply pressure on revenues. A pithier question is how well the group is protecting underlying performance from flak that also included a 44% core income drop at NatWest Markets linked to its rates business. That one-off was responsible for the net interest income miss (£3.5bn was expected in Q3; £2.01bn was reported).
Yet, with the net interest margin (NIM) also falling 5 basis points (bp) quarter-on-quarter, RBS’s formula for underlying stability still looks incomplete. After all, the main driver of weakening NIM is actually an increasingly fierce battle over residential mortgage market share as rates trend weaker.
In other words, RBS may need to double down on cost cuts, and that points to further potential headcount reduction. Such thinking hasn’t been highlighted in the group’s Q3 report. In the context of the negative PPI and NatWest surprises, a 19% stock advance on Brexit deal progress since 11th October is being trimmed on Thursday and looks set to be reduced further into the year end.
RBS’s key Q3 success was continued retail lending and deposit growth, whilst excluding a 50bp PPI hit, Tier 1 ratio at 15.7% portrays stable capital strength that keeps dividend plans on track, though not much better. New CEO Alison Rose, a 30-year RBS veteran, will be more familiar than most with where the remaining fat lies.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.