RBS declares special dividend after doubling profits

15th Feb 2019 07:09

(Sharecast News) - Royal Bank of Scotland doubled profits last year and celebrated by declaring a special payout on top of an ordinary dividend.RBS reported an operating profit before tax of £3.4bn was up 6% on the prior year and was 6% ahead of the average City analyst's forecast, while attributable profit of £1.62bn was more than double the £752m from the year before and higher than £1.58bn that analysts expected. For the historically quieter fourth quarter, attributable profit dipped to £286m from £448m in the third.While some in the City had expected the bank to keep its powder dry while Brexit uncertainty clouds the outlook, the FTSE 100 lender's directors declared a 3.5p final dividend and said they intended to pay a 7.5p special dividend on top, giving a total for the year of 13p of £1.56bn.After returning to the dividend list in October for the first time since the financial crisis, following the $4.9bn settlement made with the US Department of Justice in the summer, as well as paying a £2bn pre-tax pension contribution, the core tier-1 capital ratio ended the year at a very healthy 16.2%, up 30 basis points over the year.Management aim to reduce the CET1 ratio to around 14% by the end of 2021 through more capital distributions, with permission recently given by shareholders for the bank to carry out directed buybacks of the UK government stake.Excluding those one-off items and the £1.6bn returned to shareholders, the capital position would have increased by 240bps, driven by the increased profit and as risk-weighted assets were reduced by £12.2bn.Net interest income of £8.66bn was down slightly but total income was up slightly at £10.34n, with profit boosted due to slightly lower expenses and impairment losses, even though net interest margin of 1.98% shrank 15 basis points compared to the previous year. Fourth-quarter NIM of 1.95%, or 1.97% excluding one-off items, was 2bps higher than the quarter before.Chief executive Ross McEwan said: "This is a good performance in the face of economic and political uncertainty."He added that the UK economy "faces a heightened level of uncertainty related to the ongoing Brexit negotiations", which was one of the factors affecting efforts to cut costs.While the cost-to-income ratio fell to 71.7% after £278m of cost cutting last year, meaning £4bn of costs have been removed over the last five years, with £300m more to come in 2019, the target of a cost:income ratio of less than 50% is "increasingly challenging for the business to achieve" due to the "ongoing economic and political uncertainty and the additional ongoing costs associated with ring-fencing and Brexit".On the plus side, the board is confident of achieving a 12% return on tangible equity, which leapt from 2.2% in 2017 to 4.8% in 2018, the 2020.MARKET REACTION & ANALYSISRBS shares were up 1% to 244p after around an hour of trading on Friday.Broker Shore Capital noted that consensus was forecasting a 5.6p ordinary and 2.8p special dividend, so this is higher than expected, "although not all analysts (including us) had made explicit forecasts for one off capital returns even though there was a reasonable expectation of these being announced".Despite this, RBS has "significant capital surplus" that ShoreCap analyst Gary Greenwood calculated, post dividend accrual, is worth circa £4.2bn or around 35p per share.He said net interest margin was is 2bps better than reported in Q3 despite management previously guiding it to be flat to slightly down in Q4.For the new year, the consensus forecast was for adjusted PBT of £5.15bn, adjusted diluted EPS of 28.0p, ordinary dividend per share of 8.4p."On the whole this was just what investors have been waiting for," said market analyst Neil Wilson at Markets.com, though he felt the prospect of the government selling down its stake "will act as a residual weight on the stock performance"."The real question is just how quickly the Treasury decides to sell down its stake. Philip Hammond may well feel that a selling the roughly £18bn the government owns would be a nice little bonus for his Brexit war chest. At £2.41 on the close yesterday the shares are worth half what the govt paid for them, but needs must some times."Wilson added: "There are some really encouraging numbers in this release. RWAs were down £12.2bn through active capital management, while the CET1 ratio - the core measure of the bank's strength and resilience to shocks - improved 30 basis points to a very healthy 16.2% [...] A negative on this report card was the drop in net interest margin but I think investors will be looking through this and focus solely on the jump in profits and dividends."Richard Hunter at Interactive Investor said RBS had propelled the dividend yield "to around 5%, and immediately switching its appeal from a growth to an income stock".RBC Capital analysts felt that guidance for 2019 and medium term is "slightly lower than expectations", while plans to reduce expenses by £300m compares to a consensus forecast of £420m. They also noted that strategic costs which are stripped out from underlying income are expected to be £1.5bn in 2019 marginally higher than £1.3bn."Mortgage floor impact of £10.5bn in 2020 is slightly below the £12bn we had assumed and Basel 3 guidance of 5-10% phased from 2021-2023 is in line with our expectations. RWA guidance of £185-190bn suggest RWAs compares to consensus of £190bn implying potentially greater capital generation."