A reassuring start to a year that holds RBS (LON:RBS)'s last legacy challenge on the road to rehabilitation.
Less radical, more effective
Outperformance of the market’s profit expectations further demonstrates that RBS’s less radical, less disruptive strategy - mostly in terms of scale of the branch network and brands - is fit for purpose. True, Britain's economy currently offers favourable conditions for lenders of RBS's size, as highlighted by Lloyds Banking Group's (LON:LLOY) quarterly results this week. But a 50-basis point improvement in RBS’s key capital ratio (CET1) would not necessarily follow automatically from rising rates, low unemployment and reasonable growth.
Creditable cost control played a part, even if the £300m fall in restructuring charges in Q1 will almost certainly turn out to be exceptional, meaning that expectations of capital expansion from rationalisation for the rest of the year should be modest.
Partial or total
Still, the rise in excess capital from leeway that already stood at £6bn at the end of 2017 bolsters the bank's health further ahead of a penalty from the U.S. Department of Justice that at worst could amount to $10bn. Provisions allocated to the matter were $4.4bn at the end of last year. Probabilities for the hit in the mortgage backed securities case range from partial to total wipe out of profits and some capital progress for the year. The settlement will push ahead the horizon for dividend resumption by an extent proportional to the fine. RBS's Q1 performance suggests that when the mallet falls, the bank will be on the best possible footing to absorb the penalty, after which steps towards almost complete rehabilitation need not be protracted.
Nerves and high stakes
CEO Ross McEwan will probably be forgiven for expressing frustration over this high stakes scenario. Indeed, there does not appear to be much more he could add to the reckoning around the DoJ case, though he might have said so differently. For shareholders, those stakes are raised as RBS shares inch towards book value; having hung around 80% for months. The valuation implies the bank is close to perfect execution, regardless of well-known internal and external risks. Sharp management comments remind shareholders just how implausible perfect execution is, providing another reason to lighten up despite last year’s solid performance extending for another quarter.
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