Despite cancelled dividends and heavy losses, the group’s figures remain better than some of their peers
RBS profits halve as bank takes £800m hit
- It reported profits of £288m for Q1 compared to £707m last year, operating profits were hit by net interest margins taking a hit due to competition in the mortgage market and lower interest rates
- The group also reported tier 1 capital ratio of 16.6%, 40 basis points higher than the final quarter of 2019
- Activity since the end of March has seen the demand for loans and credit surge, bad loans will only go up and RBS will feel the impact of the bank rate cuts more
- The dividends have been suspended and will not make any further decisions on this until the end of 2020
- Recommendation: We maintain our cautious ‘Hold’ on the stock but would prefer to look elsewhere in the sector
RBS is the latest of the banks to give a status update. In comparison to expectations its numbers were reasonably good, resulting in the shares opening higher by nearly 3% on a day when the rest of the market is retrenching again. For the first quarter it reported profits of £288m, compared to £707m in the same period last year. Understandably, operating profits were hit by net interest margins taking a hit due to competition in the mortgage market and lower interest rates. Given the current crisis conditions it was always going to be loan impairments that would cause a bigger dent to profits. The impairment rate rose to 90basis points, equivalent to £800m of loans gone bad.
These figures look reasonably good for RBS, especially compared to its peers who released figures earlier this week. Part of the explanation may be that it has a smaller credit card business, an area often amongst the first to take a hit when people lose their jobs. The group also reported tier 1 capital ratio growth of 16.6%, 40 basis points higher than the final quarter of 2019. However, these are just the numbers for the first quarter and we still have the second quarter to go where the impact is expected to be the most severe. Activity since the end of March has seen the demand for loans and credit surge, facilitated by government measures. Bad loans will only go up and the group will feel the impact of the bank rate cuts more going forward.
The dividends have been suspended and the group will not make any further decisions on this until the end of 2020. The outlook for the economy and banking sector is extremely uncertain and management have withdrawn any forward guidance. In the current crisis environment we would be most cautious on banks fixing legacy issues; RBS has gone into another crisis without fully resolving the problems since the financial crisis. We maintain our cautious hold on the stock but would prefer to look elsewhere in the sector.
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