RBS sets out hard Brexit costs

RBS could scarcely have scrubbed up better in the final quarter of 2018, the last before Brexit.

Margin up, bad loans down

Its closely watched net interest margin, which gauges underlying profitability from interest received on loans and paid on deposits, recouped 2 basis points (bp) in the quarter after falling 8bp to 1.93% in Q3. Also belying concerns that consumer credit and demand are set to deteriorate, bad loans fell 19% to £398m. Furthermore, RBS chose not to top-up Brexit-linked provisions of £100m set aside in October.

Pay outs point higher

Having delivered a pleasant surprise with a special 7.5p pay out on top of 5.5p over the year, the group stressed it could increase dividends even further. With net profits more than doubled to £1.6bn, CEO Ross MacEwan’s pledge to do that whilst sticking to a 14% key capital ratio is convincing.  The Tier 1 ratio edged down to 16.2% last year from 16.7% in the year before.

‘Downside’ risk for cost rise

Still, though the stock was aloft all session, McEwan’s redoubled warning on Brexit prevented ebullience. Adding to the group’s track record of starker cautions on Britain’s EU divorce than its rivals, MacEwan noted “a heightened level of uncertainty related to the ongoing Brexit negotiations”. The group also tied probable challenges in reducing costs further to Brexit for the first time, with risks seen “to the downside”. A cost-to-income ratio target of less than 50% by 2020, has now become a “long-term” one. The retreat is backed by certain weak seams like RBS’s annual net interest margin slipping 15bp to 1.98%, missing 2.1% expected.

Brexit vs. sunny outlook

As such, Ross MacEwan’s increasingly strident warnings make sense. The sunniness, or not, of the bank’s medium-term outlook hangs inordinately on Brexit. Unlike its larger rival Lloyds, RBS’s basic return on equity looks thin on a 12-month basis at 1.6%, whilst the ‘tangible’ view showed 4.8% at last year end. The 12% target by 2020 is already a significant challenge and would probably be impossible in a disorderly Brexit. MacEwan’s lucid dividend hike has helped extend RBS stock’s climb to about 14% so far this year as confidence in the increasingly well-run bank builds. It’s uncertain how much benefit of the doubt investors will credit the group if chances of a no-deal Brexit rise.