RBS profits rise less than expected as margins tighten

26th Oct 2018 07:04

(Sharecast News) - Royal Bank of Scotland increased profits and capital in the third quarter but operating margins continued to be squeezed by competitive pressures.Total income of £3.64bn in the quarter was boosted by indemnity insurance recoveries of £272m and lower disposal losses, an increase of 15% year-on-year and 7% quarter-on-quarter, also beating the average analyst forecast of £3.3bn. For the first nine month of 2018, income was up 2.7% compared to last year.Attributable profit of £448m in the three months to 30 September was up 14.3% on the same period last year and up almost fivefold from the second quarter of this year. However, this measure of profits came in short of the £507m City consensus estimate.Litigation and conduct costs were up on the year and down on the quarter to £389m, of which £200m related to PPI misselling. The second quarter's expenses had been swelled by the £1bn paid to the US Department of Justice as a settlement over misdeeds in the run up to the global financial crisis.Excluding these costs and strategic expenses, adjusted profit before tax stood at £1.63bn for the year to date, up 31% and 20% above the £1.35bn that City analysts had pencilled in thanks to the indemnity insurance recovery. General costs are coming down as the bank's customers increasingly a funnelled towards digital banking, with 43% of sales in the UK high street bank coming through the digital channel.Net interest margin, the difference between a bank's lending and borrowing rates, shrank to 1.93% from 2.01% in the preceding quarter, with 3 basis points related to competitive pressure, 2 basis points due to higher average liquidity balances and the rest one-off items.The strength of the balance sheet was shown with the CET1 ratio rising to 16.7% from 16.6% in the second quarter, reflecting the the attributable profit in the quarter and a further reductions in risk-weighted assets."We have taken an additional £100m impairment charge reflecting the more uncertain economic outlook," the bank said, though underlying credit conditions remained benign during the quarter.MARKET REACTION & ANALYSISRBS shares dropped 5% in early trading on Friday to 222.8p, hitting their lowest levels since January 2017. UK taxpayers own a 62.4% stake in the bank, after June's placing by the government of 925m shares at 271p, reducing its ownership of ordinary shares from 70.1%.Impairment charges of £240m were worse than the £166m analysts were expecting, with Jefferies saying the £100m incremental impairment charge is "not explained well and is at odds with extensive research we conducted on corporate credit and also consumer credit. It is also at odds with the actions of other banks operating in the same market."Otherwise Jefferies said operating costs remained "well controlled", but said the net promoter scores "bear watching", with the results presentation showing deteriorating net promotor scores across most brands except for NatWest Business Banking. "The RBS business banking net promoter scores continue to deteriorate and remain sharply negative. All of this bears watching as net promoter scores can be a harbinger of future business growth and customer engagement."Broker Shore Capital said that, although NIM was worse than it had expected, it was a "strong set" of results, with profit better than expected, other expenses trimmed to continue "the trajectory of improving operational efficiency" and while impairments were increased they remain low in absolute terms. The balance sheet is "in excellent shape", with £7.2bn or 60p per share of surplus capital relative to the bank's self-imposed minimum benchmark core tier 1 ratio of 13.0% versus £6.2bn three months earlier."The group has already signalled that it will look to return surplus capital to shareholders and we expect plans to do so will be clarified once the latest Bank of England Stress Test results have been reported (due 5th December), with a more detailed announcement likely alongside the full year results in February 2019, in our view," said ShoreCap analyst Gary Greenwood.Laith Khalaf at Hargreaves Lansdown felt the results were "a bit of a curate's egg", with headline numbers beating expectations due to one-off items coming on the right side of the scales. "The core business is looking pretty stagnant, at best, and the bank's interest margin is heading in the wrong direction, despite rising rates."He also warned that with less than a year before the PPI claims window closes, banks could face more charges as activity ramps up ahead of that deadline.The £100m Brexit charge, Khalaf said, "serves as a reminder that the bank's fortunes are very heavily influenced by the domestic economy, and by extension, so is its share price".