RBS share price drops as it warns of Brexit uncertainties despite rising profit

Shares fall 4.5% as concerns on the horizon grow.

Article updated: 26 October 2018 9:00am Author: Graham Spooner

  • Shares are down 4.5% in early morning trading following a mixed third quarter trading update.
  • The bank has set aside £100m to cover economic uncertainty as the UK prepares to leave the EU.
  • We continue to recommend the shares as a ‘hold’ for investors seeking growth and willing to accept a medium level of risk.

A third quarter trading update has left RBS shares down 4.5% in early morning trading which are currently languishing at an 18-month low.

RBS set aside £100m to deal with greater economic uncertainty as the UK prepares to leave the EU; this makes it the first major UK bank to make such a provision linked to Brexit. The provision highlights the bank’s concerns that its customers might become less able to pay their debts after the UK’s departure, unsurprisingly leaving a confused and uncertain feeling amongst investors. This is particularly true due to the fairly upbeat reports from Barclays and Lloyds earlier this week and while HSBC put aside $245 million at its half-year results to account for greater economic uncertainty, RBS is the first big UK bank to link the move to Brexit.

Meanwhile, basic earnings per share stood at 3.7p, a dramatic increase on the 0.9p from the previous quarter and up from 3.3p for the same period in 2017. Operating profit for the quarter increased to £961m on the back of an increase in revenue to £3.4bn.

However, the market appears to be focussed on the group taking the additional £100m impairment charge and the decline in its net interest margin from 2.01% to 1.93% and net profit of £448 million, which was a little below analyst expectations. There was also a further £200m expense to cover PPI mis-selling, taking the total to around £5.3bn. Nonetheless, the group reaffirmed its previous guidance

Though it cannot be denied that the bank has made significant improvement, we remain cautious on the stock. It gave no clue as to its future dividend policy, information shareholders are hungry for after being starved of pay-outs until recently for 10 years. We recommend a hold on to the shares for the patient investor.

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Graham Spooner portrait photo
Graham Spooner

Investment Research Analyst

Graham started out as a fully authorised dealer on the Stock Exchange trading floor and for various banks, before becoming an FCA-approved investment adviser. Now a respected voice in the media, Graham’s share tips and comments on the markets are frequently sought by the national press.