Royal Bank of Scotland drops as gloom about Brexit deepens

Bloomberg

Royal Bank of Scotland Group Plc(RBS) slid as the state-controlled lender indicated it’s unlikely to reach key profitability targets next year given the political and economic tension around Brexit.
Outgoing Chief Executive Officer Ross McEwan blamed an “uncertain and competitive environment” as the bank reported second-quarter net interest income that missed analysts’ estimates. The bank said it’s very unlikely to meet some targets, including return on tangible equity of more than 12% and a cost-to-income ratio of less than 50% next year.
The revision comes after the Bank of England warned it can’t necessarily deliver a growth-boosting package in the event of Brexit without a transition deal.
“There is considerable uncertainty and considerable nervousness in what may happen,” Chairman Howard Davies said during a call with reporters. “We are expecting low growth at the moment.”
The shares dropped as much as 6.4%, even as the bank announced a higher-than-expected special dividend. Increased competition in the mortgage market is hampering banks’ interest income, but the biggest uncertainty is around Brexit. Like other British lenders, RBS has been warning that the slowing economy is likely to eat into earnings.
“We have seen the yield curve declining and very strong competition in the mortgage market, which we think will continue for quite some time given the amount of liquidity in that market,” McEwan said. Those conditions “may continue to put quite a big pressure on the net interest margin. To which extent, we are not too sure,” he said.
Brexit Caution
RBS, historically the UK’s largest lender to small- and medium-size businesses, remains one of the strongest-capitalized banks in Europe after the Nordic lenders. It has adopted a more cautious approach to Brexit than its peers, booking provisions to face a potential deterioration of the economy at the end of last year.
“The most important thing we can do as a bank is that we have the right liquidity” in the event of a no-deal Brexit, Katie Murray, the bank’s chief financial officer, said in an interview with Bloomberg Television.
RBS reported its common equity Tier 1 ratio, a measure of capital strength, of 17.1% before the dividend payouts. The bank said it plans to award a 12 pence special dividend, returning 1.7 billion pounds ($2.1 billion) to shareholders.
The lender has also laid the groundwork this year to offload excess capital in a special share purchase, which would help the UK government reduce its majority stake in the lender. However, with the Brexit process in chaos and RBS shares down over the past year, the UK government has demurred from selling down its holding. The last sale in June last year was at 270 pence. The government “will have a pricing point that they don’t share with us,” McEwan said.
The Edinburgh-based group, which required one of the costliest bailouts in history during the financial crisis a decade ago, offered no fresh details of its search for a new chief executive officer after McEwan said he will take a job in Australia.
RBS Chairman Davies said the bank is “making good progress” on the search, without giving more information.
“Overall another set of disappointing of results from RBS, which is now facing an extremely demanding operating environment with no committed senior management,” said Edward Firth, an analyst with Keefe, Bruyette& Woods in London, who has an underperform rating on the shares.