RBS (LON:RBS) shares are in the red over concerns about profit margins and the balance sheet strength has diminished a little. RBS confirmed that first-quarter operating profit dropped by 16.48% to just over £1 billion, which topped forecasts.
The profit attributable to shareholders fell by over 12.5% to £707 million, but it comfortably topped the £546 million forecast. Uncertainty in relation to Brexit is regularly used as an excuse for underperforming, but it is justified for RBS. The flattening of the yield curve has made it harder for banks to make money, and the net interest margin fell to 1.89% from 2.04% in the same period last year. To make matters worse, the cost income ratio for the period was 63.4%, up from 60.5% last year. The CET1 ratio slipped to 16.2%, and that is a little concerning, but the bank is still in good health.
Ross McEwan, the CEO, announced his plans to step down yesterday, and given that the bank has returned to profit, and has started paying dividends again, it is fair to say that Mr McEwan has done well in turning the company around. Asset disposals, and downsizing have played a major role is the restructuring programme, and even though more is still needed, it is certainty in better shape now.
RBS performed well last year. Full-year operating profit before tax was £3.35 billion. Operating profit before tax for the fourth-quarter was £572 million, which topped the estimate of £371 million. The bank declared a final dividend of 3.5p, and it also announced a special dividend of 7.5p – its first special dividend since the credit crisis. On the year, impairment provisions were £3.3 billion, which is an improvement on the £3.8 billion last year. The common equity tier 1 ratio for the year was 16.2%, and that compares with 15.9% a year ago. One disappointing aspect of the report was that net interest margin dropped from 2.13% to 1.98%, but that is likely to be the case for UK banks across the board. RBS is clearly heading in the right direction, and it is slowly shaking off the negative image it earned during the credit crisis.
The government is still the majority shareholder in the bank, and it plans to sell-off its remaining stake by 2024. The fact that Westminster is unwinding its shareholding and has a strategy to bring its shareholding to zero indicates their belief in the bank’s ability to stand on its own two feet by then. Some banks required government assistance during the credit crisis, and many returned to robust health, and some investors believe that RBS is on that long-term path.
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