Royal Bank of Scotland (LSE: RBS) was today the last of the big four FTSE 100 banks to release its half-year results. And the report made for dismal reading, sending the shares down 5% in early trading.
Legacy issues
RBS posted a first-half loss of just over £2bn as legacy issues once again took their toll. We already knew the bank had made a final £1.2bn payment on the government’s dividend access share in Q1 (paving the way for ordinary dividends to resume at some point), but Q2 saw a whopping £1.3bn of further exceptional items in the familiar form of litigation and conduct costs, including further provisions for PPI and shareholder litigation relating to the 2008 rights issue.
Meanwhile, as a result of US conduct investigations, the bank said “substantial related incremental provisions may be recognised during the remainder of the year.“
Other troubles
RBS took impairment charges in its oil & gas and shipping portfolios. It cautioned on “a continuing risk of large single name/sector driven events across our portfolios given the uncertain macroeconomic environment.” And it added that the Brexit vote “has increased the level of uncertainty however it is too early at this point to quantify the impact of any potential credit losses that may result.”
The company expects restructuring costs to remain high in 2016, totalling over £1bn. The H1 charge was £0.63bn, well over half of which related to Williams & Glyn, which RBS is obliged to divest. However, management has abandoned a programme to create a cloned banking platform to separate Williams & Glyn, and will “prioritise exploring alternative means to achieve divestment.”
And the good news?
I couldn’t find too many positives in the results, and most of them were followed by a big ‘but’. For example, there was decent growth in mortgages and commercial lending — but, going forward, momentum is likely to be offset by headwinds from the reduction in interchange fees, low interest rates and the uncertain macroeconomic environment.
Similarly, the company said it’s on track to achieve a £0.8bn cost reduction in 2016 — but the first-half cost-to-income ratio deteriorated markedly on the same period last year (72% versus 64%). Management said: “In the current low rate and low growth environment, achieving our longer-term cost:income ratio and return targets by 2019 is likely to be more challenging.”
Investment case
I find it hard to see there’s an investment case for RBS at this stage. The bank is still 73%-owned by the taxpayer and the resumption of dividends for shareholders looks as far away as ever. RBS has faced an uphill battle since the financial crisis, and it seems to me that the gradient of that hill, which looked like it might be starting to level off a year or two ago, has just steepened again.
The shares are currently trading around 183p, which is well down from their post-financial-crisis high of over 400p in late 2014. However, earnings downgrade has followed earnings downgrade such that the bank trades on a rich 17 times current-year forecast earnings.
I wouldn’t be surprised to see further earnings markdowns from analysts, both in the short and medium term. In which case I see the shares re-testing their post-referendum low of 149p, rather than heading north from their current level. As such, I can only rate RBS a sell, until earnings visibility improves.