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Royal Bank of Scotland

RBS unveils special dividend and higher profits but shares fall on 2020 warning

RBS maintained its outlook for the 2019 financial year but warned that it was unlikely to achieve some of its targets in 2020 amid Brexit uncertainty

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Competitive pressures in the mortgage business squeezed the bank's margins

Royal Bank of Scotland Group PLC (LON:RBS) announced plans to return £1.7bn to shareholders as it reported a 47% rise in first-half profit but shares dropped as it issued a cautious outlook.

The bank, which is still majority owned by the government since its £45.5bn bailout in 2008 – recommended a special dividend of 12p per share along with an ordinary interim dividend of 2p.

Profit attributable to shareholders increased to £2.0bn in the six months to the end of June from £888mln a year ago as the lender reduced costs by £173mln as part of its ongoing restructuring programme.

Income boosted by Alawwal merger 

Total income rose to £7.1bn from £6.7bn last year but mainly due to a £44mln gain on the completion of a merger between Alawwal bank and Saudi British Bank.

RBS, through Dutch subsidiary NatWest Markets N.V., was part of a consortium including NLFI and Banco Santander S.A. that held an aggregate 40% equity stake in Alawwal bank.

Income was also lifted by foreign exchange recycling gains of £290mln and a £256mln legacy liability release.

Excluding items, income fell by 1.7% as tough competition in mortgage lending weighed on margins.

The net interest margin – the difference between interest earned on loans and money paid on deposits – fell 5 basis points to 2.02%,

The common equity tier 1 capital ratio – a key measure of financial strength edged down to 16.0% at the end of June from 16.2% at the end of March.

Brexit uncertainty to hit 2020 results 

RBS maintained its outlook for the 2019 financial year but warned that it was unlikely to achieve its target return on tangible equity of more than 12% and cost to income ratio of less than 50% in 2020 due to “continued economic and political uncertainty and the contraction of the yield curve”.

The return on tangible equity rose to 12.1% in the first half from 5.3% last year while the cost to income ratio fell to 57.2% from 70.4%. Excluding the gain on the Alawwal merger, the return on tangible equity was 7.5%.

In reaction to the 2020 warning, shares fell 5.5% to 205p in morning trading.

Oanda's senior market analyst Craig Erlam said: "The lender has returned to profitability in recent years and exceeded expectations again in the last quarter, enabling it to announce an 2p interim dividend and a 12p special dividend.

"It's not all good news though as it also warned about the tough economic environment - which should surprise no one at this stage - which will make it unlikely to meet its 2020 return on tangible equity goal. Not all good news then but its certainly going in the right direction."

 

Quick facts: Royal Bank of Scotland

Price: £2.07

Market: LSE
Market Cap: £25.07 billion
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