RBS slides on Brexit impact warning

Bloomberg

Royal Bank of Scotland (RBS) Group Plc tumbled after the state-backed lender said Britain’s slowing economy is likely to bite into income over the coming months.
The bank’s shares fell as much as seven percent after it sounded the strongest warning yet on the impact of Brexit this year. The note of caution overshadowed the bank posting a better-than-expected operating profit before tax of 1.01 billion pounds ($1.3 billion), according to its first quarter earnings statement. “We recognise 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,” said RBS.
RBS, historically the UK’s largest lender to small- and medium-sized businesses, is contending with nervous customers cutting investments during a process that has now been delayed until at least October. The extension to the Brexit deadline and the possibility of further delays may spell further declines in UK corporate investment in coming quarters, analysts at Bloomberg Intelligence have said.
The weaker outlook has prompted investors to doubt the bank’s ability to reach its profitability target. Edward Firth, an analyst at Keefe, Bruyette & Woods, said that the bank probably won’t achieve its target of a return on tangible equity above 12 percent for 2020, citing “disappointing results.”
RBS isn’t the only one feeling the Brexit pinch. Barclays Plc’s UK retail division had a difficult quarter too with weaker revenues, while its corporate and investment bank reported lower activity in capital markets due to Brexit.
The bank relies heavily on its mortgage book: personal banking, which includes home loans, made about half of the bank’s net interest income last year. Chief Executive Officer Ross McEwan said on a call with analysts that the UK mortgages market is witnessing unprecedented levels of competition.
“RBS has the largest exposure to business banking in the sector,” said Shore Capital analyst Gary Greenwood in a note. The consensus “appears right” to doubt the bank will achieve its return on tangible equity target given the cautious outlook on the UK economy, he added.