Market News & Analysis
RBS’s shaky quarter points to more cuts
Ken Odeluga October 24, 2019 6:26 PM
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.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.
Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.