Shares in government-owned Royal Bank of Scotland (RBS) fall 5% to 237p despite the high street lender posting better than expected first quarter earnings.
Net profits for the three months to 31 March were £707m, which was down on last year’s £808m but well above the average of £546m forecast by analysts.
However the stock has been marked down due to a poor performance from its sub-scale investment banking unit, which is likely to prompt questions as to whether it should continue downsizing the business or just exit it altogether.
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UK BANKING PLODDING ON
Total income from UK Personal Banking dipped slightly year on year to £1.24bn reflecting what the bank calls ‘a continued competitive mortgage market’.
Lending grew by £1.7bn over the quarter to £150.6bn in total but the net interest margin (the difference between the average interest rate it charges on loans and the rate it pays on deposits) narrowed to 2.62% against 2.72% a year ago.
Impairment losses, or charges for non-performing loans, jumped from £68m to £112m as the bank recovered fewer previous bad loans and default rates rose although the overall ratio of bad loans is still low by historic standards at just 0.3% of total lending.
Income from Commercial Banking was down by 7% to £1.08bn due to a fall in loans and deposits since the start of the year although the net interest margin did tick up to 1.99%.
While it is keeping its full year targets, RBS cautions that ‘the ongoing impact of Brexit uncertainty on the economy, and associated delay in business borrowing decisions, is likely to make income growth more challenging in the near term.’
The one bright spot in the UK was Private Banking which is reserved for high net worth customers. Income and profits were well ahead of last year and assets under management grew by £1.4bn to £27.8bn over the quarter.
INVESTMENT BANK ON ITS LAST LEGS?
In contrast to the steady if uninspiring performance of the retail and commercial units, the Markets business had a howler of a quarter with total income down 41% to £256m and operating losses of £62m against a profit of £97m the previous year.
Admittedly part of the reason for the sharp drop in income was a one-off reduction in legacy income from some RBS debt products, but there was also a hefty drop in income due to narrower funding spreads while the core business performed poorly due to lower client activity and ‘uncertain market conditions’.
The net interest margin was -0.39% last quarter compared with 0.54% a year ago and the cost to income ratio, which is falling everywhere else at RBS, soared to 130% from 80% last year.
Given that the Markets business employs nearly £140bn of capital, yet its contribution to profits is marginal at best and costs seem to be completely disproportionate compared with the rest of the group, investors would be within their rights to ask whether RBS should continue to support it.
After chief executive after Ross McEwan unexpectedly stepped down yesterday, that is a question the new boss will need to address.
