High-street lender Royal Bank of Scotland (RBS) was the worst performer on the FTSE 100, down 3% to 226p, after its third quarter update revealed a bigger than anticipated charge for PPI mis-selling and a poor performance from its NatWest Markets division.
The bank put aside another £900m of provisions for mis-sold payment protection insurance, which was at the top end of its guidance for the quarter, taking its total provisions for PPI to £6.2bn.
Meanwhile, after a poor second quarter, the NatWest Markets (NWM) unit reported a third quarter net loss of £20m against a profit of £198m a year ago, once again blaming ‘challenging’ conditions including a fall in bond yields.
The only positive highlight in the third quarter update was that the bank maintained its previously-lowered 2019 and 2020 targets.
MARGINS UNDER PRESSURE
Although it managed to grow its loan book during the quarter, the bank saw its net interest margin (the difference between what it charges on loans and what it pays on deposits) shrink by another five basis points or 0.05% from a year ago to 1.97%.
Competition in the mortgage market meant it made a lower return on new loans that it had on older loans, or in bank-speak ‘front book margins remain lower than back book margins’.
Low returns on mortgages have led several non-traditional players like Sainsbury (SBRY) and Tesco (TSCO) to stop lending to home-buyers. Tesco even went a step further, selling its entire mortgage business to Lloyds (LLOY) last month for £3.8bn.
Meanwhile the charge for ‘impairments’, or money put aside to cover potential bad loans, rose again last quarter to £131m compared with £66m a year ago.
The bank says the increase ‘includes an additional charge in respect of increased economic uncertainty’, which seems sensible, but it admits that the underlying level of defaults has risen in the past year which is cause for concern.
NOT WORTH MUCH
The worst part of the third quarter report was the ‘deplorable' result at NatWest Markets, as Joseph Dickerson at Jefferies put it.
After a tough second quarter, NWM generated just £143m of core income in the third quarter against £325m a year ago and posted an operating loss of £198m.
It blamed ‘elevated hedging costs caused by reduced liquidity and wider bid-offer spreads as the market experienced sustained curve flattening across global fixed income markets’.
That will be little consolation to shareholders given how much money NWM soaks up and how little cash it seems to generate through the cycle.
STILL HOPING FOR A SPECIAL PAYOUT
At today’s price, RBS shares are yielding over 10.5% assuming a dividend of roughly 24p including a special payment.
With a core equity tier 1 (CET1) ratio of 15.7% the bank should be able to afford a repeat of last year’s special pay-out, although new chief executive Alison Rose - a 27-year veteran of RBS and current deputy chief of NatWest - is likely to face pressure to restructure the markets business when she takes the helm next month, which will cost more money.
Rose’s other big task is to undo the current 62% government holding and manage the bank’s transition back to private ownership.
