Shares in Royal Bank of Scotland (RBS) dropped 6.5% to 214p on Friday despite full year results which beat forecasts as investors focused instead on a disappointing dividend payout and an uninspiring outlook for return on equity over the next couple of years.
Net interest income – the difference between the amount the bank earns in interest charges minus the amount it pays out on deposits – shrank by 7% to £8.05bn last year due to the competitive lending market, especially in residential mortgages where margins have been whittled down due to weak demand.
However non-interest income surged by over 30% to £6.2bn to drive total income up 6% to £14.25bn, comfortably above market estimates. In addition costs were lower than expected so pre-tax operating earnings rose 26% to £4.23m, ahead of market estimates.
THAT DON’T IMPRESS ME MUCH
Normally this would be enough to send the shares skywards but, given the bank’s success at controlling costs, investors were less than impressed by the skimpy final dividend of 3p and the special dividend of 5p per share.
Analysts at Jefferies calculate that RBS had excess capital of £5.7bn at the end of last year, and thanks to a reduction in the amount of cash it has to put aside to back risk-weighted assets at NatWest Markets it could free up another £3bn of capital this year.
Investors also seemed unimpressed by the bank’s low medium-term return on tangible equity (RoTE) target of 9% to 11%, considering that it was already making a 9.8% return in the fourth quarter.
BACK TO THE FUTURE
Neither did the bank’s attempt to re-brand itself go down particularly well. In an effort to distance itself from the gung-ho deal-making days of the 2000s, which even its website says resulted in ‘a series of bad mistakes culminating in the crisis of 2008’, the bank is being re-branded as good old-fashioned NatWest.
This makes sense commercially as although there are 12 different brands within the group, 80% of earnings come from the NatWest brand in one shape or another.
It also makes sense from a marketing perspective as the NatWest brand has a far better net promoter score (NPS) and trust score than the RBS brand.