15th Feb 2019 09:30
LONDON (Alliance News) - Royal Bank of Scotland Group PLC on Friday reported "strong progress" in 2018 as the lender posted its second consecutive year of profit, rewarding shareholders with a special dividend, but warned it may not yet be out of the woods, with further expected strategic costs in 2019.
Shares in the majority state-owned lender were up 1.3% early Friday at 244.80 pence each. In the past 12 months, shares in RBS are down more than 10%.
The bank's attributable profit for 2018 came in at GBP1.62 billion, beating consensus of GBP1.42 billion. In 2017, when RBS reported its first profit in a decade, the figure was GBP752 million.
Net interest income for 2018 was GBP8.66 billion, against GBP8.65 billion consensus and GBP8.99 billion a year prior. Total income was GBP13.40 billion, compared to 2017's GBP13.13 billion and the market expectation of GBP13.38 billion.
Pretax operating profit was GBP3.36 billion, beating GBP3.16 billion consensus and well above the GBP2.24 billion in 2017.
RBS declared a 7.5 pence per share special dividend for 2018, and will pay a final dividend of 3.5p. Combined with the bank's 2.0p interim payout, the year's total payout is 13p.
"2018 was a year of strong progress on our strategy - we settled our remaining major legacy issues, paid our first dividend in ten years and delivered another full year bottom line profit. However, while our financial performance is more assured, we know that a significant gap remains to achieving our ambition to be the best bank for customers. We are fully focused on closing this gap," said Chief Executive Ross McEwan.
"We have made good progress on making RBS a much simpler, safer and more customer focused bank. From a position of capital strength, we will aim to improve returns for you, our shareholders," McEwan added.
The UK government holds a 62.4% stake in RBS, but shareholders recently backed company plans to buy back up to GBP1.5 billion worth of shares from the government. Under the scheme, which will need to be approved by the Bank of England, the bank would be able to buy back up to 4.99% of the government's stake in any one year.
The government has said, however, it plans to sell its stake in 2024, indicating it does not want to sell at RBS's current share price. The Treasury is expected to lose billions on its initial GBP45 billion bailout of RBS in 2008.
The 2018 interim dividend was RBS's first in ten years, after being bailed out by the UK government during the financial crisis. The bank said it expects to maintain a dividend payout rate of around 40% of attributable profit going forward.
RBS's common equity tier 1 ratio, or CET1, at the end of 2018 was 16.2%. Consensus had seen it at 16.5%. At the end of 2017, it had been 15.9%. By the end of 2021, RBS is guiding for a CET1 ratio of 14%.
RBS's risk-weighted assets at the end of 2018 stood at GBP188.7 billion, down from GBP200.9 billion at the end of 2017. The drop is risk-weighted assets was credited for rise in the CET1 ratio.
Excluding a GBP2 billion pension contribution, the bank's settlement with the US Department of Justice and the GBP1.6 billion special dividend, RBS's CET1 ratio increased 240 basis points.
RBS's net interest margin at the end of 2018 was 1.98%, up from 1.93% at the end of the third quarter but down from 2.13% at the end of 2017.
The bank's loans to customers in 2018 decreased to GBP305.1 billion from GBP310.1 billion in 2017. Customer deposits at December 31 stood at GBP360.9 billion, compared to GBP361.3 billion the year before.
The lender's return on tangible equity was 4.8% during the period, more than double the 2.2% in 2017.
RBS's total operating costs decreased 7.2% in 2018 to GBP9.65 billion from GBP10.40 billion. The bank's litigation costs were flat at GBP1.28 billion but strategic costs fell 36% to GBP1.00 billion.
"RBS continues its progress apace, although the list of challenges remaining bear testament to the sheer scale of the turnaround it has faced. The bank is an entirely different beast to the one which entered the financial crisis and only more recently has it approached resembling something which can be regarded as a healthy business," said Richard Hunter, head of markets at Interactive Investor.
He continued: "However, the cost income ratio not only remains stubbornly high at over 70%, but the longer term target of under 50% may need to be reconsidered. Elsewhere, net interest margin has fallen, impairments are expected to increase this year, and the return on equity figure is low. The NatWest Markets arm endured a difficult period, uncertainty over the eventual outcome of Brexit has hampered business activity and the government stake remains a long-term overhang on the share price."
"There is little doubt that much progress has been made, but investors will need to take a view on how much longer the repairs will take. Today has provided an extra carrot in the form of the special dividend, whereby shareholders are now being paid to wait, but it is unclear whether this will light any sort of fire under a share price which has declined 12% over the last year, as compared to a 0.5% dip for the wider FTSE 100. It is perhaps reflective of the sometimes steely nature of professional investors that the market consensus of the shares has recently hardened to a strong buy, underlining confidence in prospects for the previously beleaguered bank," Hunter added.
Within divisions, RBS UK Personal & Business Banking total income was GBP6.28 billion in 2018, down from GBP6.48 billion posted the year before. The division's operating profit increased 2.1% to GBP2.46 billion from GBP2.41 billion.
The unit's gross new mortgage lending in 2018 was 1.9% lower at GBP30.4 billion. Its mortgage market share was maintained at 11.3%. RBS said the unit maintained its "prudent approach" to risk in a "very competitive market".
In Commercial Banking, total income decreased 3.2% to GBP3.37 billion from GBP3.48 billion. The division's operating profit increased 24% to GBP1.36 billion from GBP1.11 billion.
NatWest Markets total income increased 37% to GBP1.44 billion in 2018 from GBP1.05 billion the year before. The division posted an operating loss of GBP70 million narrowed from GBP977 million in 2017.
RBS intends to move around GBP35 billion in risk-weighted assets to its NatWest Markets NV subsidiary in the Netherlands from NatWest Markets in the UK, subject to court approval.
Looking forward, RBS said it will continue to "deal with the range of significant risks and uncertainties" caused by the current economic, political and regulatory environment.
The lender expects to incur strategic costs - such as for job cuts and branch closures - of about GBP2.5 billion in 2018 and 2019, with GBP1.0 billion already booked in 2018. Excluding strategic and legal costs, RBS said it intends to shave GBP300 million from its operating costs.
The lender warned the impact of the ongoing political uncertainty could affect its risk-weighted assets, in particular its credit loss outcome. As a result, RBS expects its impairments to increase in 2019.
RBS said it expects to end 2019 with about GBP185 billion to GBP190 billion of risk weighted asset, down from the GBP188.7 billion reported for the end of 2018.
The lender said it remains "comfortable" with its 2020 return on tangible equity target of more than 12% but recognises its cost-income ratio target of less than 50% is "increasingly challenging". RBS blamed Brexit for the doubt.
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