For Royal Bank of Scotland Group (LSE: RBS) investors, trading continues to be difficult in the first part of 2020. The ‘Boris Bounce’ that lifted the banking behemoth’s shares to eight-month highs in the wake of UK general election has well and truly worn off and it’s now erased all of the gains it enjoyed following December’s ballot.
That emphatic Conservative victory has allowed the government’s Withdrawal Agreement to pass the House of Commons and it’ll be signed off in the coming days, taking a no-deal Brexit off the table (for now, at least).
But the chances of a disorderly withdrawal from the European Union haven’t been eliminated. Tough trade talks between lawmakers in London and Brussels are about to start, difficulties with which would see the UK still plunge off the no-deal cliff.
Economic struggles persist
It’s worth saying that delays to the withdrawal process are nothing new, Prime Minister Johnson himself extending the Article 50 deadline back in October when previously proclaiming he’d rather “die in a ditch” than do so. We could well see another U-turn at the end of the year rather than an economically-disastrous withdrawal.
But whether or not Number 10 is actually contemplating the possibility of a hard Brexit is somewhat irrelevant. The mere suggestion that it is prepared to press the no-deal button is likely to hamper the British economy, and thus the trading performance of RBS and the broader banking sector, for most of 2020.
The impact of this political and economic confusion was made apparent again on Monday morning through Office for National Statistics data. According to the body, the UK economy shrank 0.3% in November, leading it to comment that “long term, the economy continues to slow, with growth in the economy compared to the same time last year at its lowest since the spring of 2012.”
Worth the risk?
RBS is already struggling under the weight of an underperforming economy as bad loans rise and revenues sink. And things could be about to get a lot worse for the FTSE 100 firm’s profits column should the Bank of England step in to help improve conditions.
Bank chief Mark Carney said last week that some “near-term stimulus” could be just around the corner, and speculation of a rate reduction gained more ground over the weekend. In an interview with the Financial Times, policymaker Gertjan Vlieghe said that he’d be joining the crowd calling for a cut should economic data fail to improve. Presumably that update from the ONS today has darkened his opinion of the domestic economy still further.
City analysts expect earnings at RBS to rise 6% this year, though in the current climate it’s easy to see hopes of any profits improvement gradually fade as we move through the year. So forget about the bank’s low forward P/E ratio below 10 times and monster 6% dividend yield, I say: this is a share I reckon could sink in value in 2020.