RBS share price: what to expect from Q1 results

Royal Bank of Scotland did well to bounce back in 2018 but investors are wary of what this year holds for the bank. We explain what to watch out for ahead of the Q1 results.

RBS Source: Bloomberg

When is Royal Bank of Scotland’s earnings date?

Royal Bank of Scotland (RBS) will release its first quarter (Q1) results on Friday 26 April, 2019. It will cover the three months to the end of March 2019.

Royal Bank of Scotland results preview: What does the City expect?

All appeared well when RBS released its 2018 results. The bank built on the success of 2017, when it got itself back into the black for the first time since having to be bailed out to avoid succumbing to the financial crisis. RBS posted a 50% leap in pre-tax profit last year to £3.36 billion as it continued to make deep cuts in costs and saw a reduction in bad loans, with revenue only managing to climb a meagre 2%.

But the biggest reward was reserved for shareholders as RBS not only reinstated its ordinary dividend in 2018 for the first time in ten years but surprised them with a large special payout that saw investors sprayed with £1.6 billion in cash overall.

However, as much as RBS bounced back last year the bank made it clear it was heading into 2019 with caution, having warned Brexit, regulatory changes and other issues would cause the amount of bad loans to rise this year. It has also implied that its cost-cutting efforts, the key driver for the bank’s improved profitability, is reaching its peak after conceding it is becoming less and less likely to achieve its cost saving goals. This has led some to question the bank’s future after years of shrinking itself to escape the red and whether it can start to improve through growth.

Read more about how RBS boosts dividend in 2018 but Brexit threatens cost hikes

And those questions have grown stronger after chief executive officer (CEO) Ross McEwan resigned just two days before the Q1 results are released. The CEO, who has shrank RBS down during his five-and-a-half-year tenure to return the bank to profit, said: 'With much of the restructuring done and the bank on a strong and profitable footing, I have delivered the strategy that I set out in 2013 and now feels like the right time for me to step aside and for a new chief executive to lead the bank.' His departure was anticipated by many and while the CEO will not leave immediately, there will be understandable nerves around a change of chief when the outlook is so uncertain.

Royal Bank of Scotland Q1 2019 result expectations

RBS key figures - Bloomberg Q1 2019 Q1 2018
Revenue £3.24 billion £3.30 billion
Adjusted EPS 8.3p 6.6p

What to watch out for in Royal Bank of Scotland’s Q1 2019 results?

Change in guidance

The success achieved in 2018 was quickly overcast by the bank’s outlook for 2019, having warned that there would be a 'significant increase' in the number of bad loans booked this year compared to 2018 because of 'ongoing political uncertainties and geopolitical tensions'. Although it has said the rise would be 'below our through-the-cycle loss rate assumption of 30-40 basis points'. It has also said it expects to end 2019 with Risk Weighted Assets (RWAs) of £185 billion to £190 billion, which would compared to £189 billion at the end of December.

Over the medium-term RBS is trying to achieve a return on tangible equity of greater than 12% from 2020 onwards – a significant step up from the 4.8% reported in 2018 (it exited 2018 with a 3.5% return in Q4), although RBS managed to more than double 2017’s return of 2.2%. Investors should keep an eye out to any changes to guidance, including future costs related to Basel 3 amendments. It recently revised its forecast to say the impact would be a 5%-10% rise in RWAs over 2021 to 2023, compared to an original forecast of a 10% rise solely confined to 2021. However, this estimate is highly sensitive and likely to change with RBS having said the 'details are still subject to significant regulatory uncertainty'.

CET1 ratio and cost-cutting

RBS reported a common equity tier 1 (CET1) ratio – the key measure of balance sheet strength – of 16.2% at the end of 2018, having edged down from 16.7% three months earlier. While that remains well above its medium-term target to maintain a ratio of above 14% through to the end of 2021, shareholders will be keen to see it has not deteriorated for another quarter.

RBS is attempting to deliver £2.5 billion in ‘strategic’ cost-savings over 2018 and 2019. Having made £1 billion of savings last year the bank has another £1.5 billion to deliver in 2019. It is also aiming to cut £300 million off its operating costs in 2019 relative to last year. This is part of its medium-term target to deliver a cost:income ratio (how fast costs grow compared to revenue) of less than 50% by the end of 2020, although RBS has said the cost of Brexit preparations and implementing new ringfencing legislation means it is becoming ‘increasingly challenging’ to achieve, ‘with risk being to the downside’. The ratio improved to 71.7% in 2018 from 79.0% in 2017, but exited the year at 80.5% in Q4.

Dividend

Although the 7.5p special dividend meant its overall annual payout of 13.5p in 2018 – its first since being bailed out after the financial crisis – was considerably higher than expected it is uncertain whether RBS will be able to put in a repeat performance this year considering the cautious outlook. It has said it intends to pay 40% of attributable profit to shareholders in dividends this year, so it will be dependent on its profitability.

Privatisation

The UK government (and therefore taxpayer) still owns a 62.4% stake in RBS after completing its last sale in June 2018, when it offloaded a 7.7% stake. The government has pledged to sell off all of its remaining shares in the bank by the end of 2023 while RBS has said it wants to be completely free of government investment by March 2024. RBS does have the ability to purchase shares back from the government under what is known as a ‘directed buyback’ and some believed the process could be accelerated after the strong 2018 results. However, the fact RBS shares have lost further value since the government’s last sale and that both the bank and the government face huge uncertainty from Brexit means many think it is unlikely to happen anytime soon. Many consider the next big milestone will be the government’s stake being reduced blow the 50% threshold.

Digitisation

RBS has pledged to invest £1 billion in 2019 to upgrade legacy systems and roll-out new services and products for customers. It ended 2018 with 6.4 million mobile customers and said nearly three-quarters of all its current account customers in the UK were regular users of its digital services such as mobile banking. Digital sales accounted for just under half of all new product sales last year, up from just 26% in 2014. It launched its first fully digital service for business customers late last year, allowing existing ones to apply for loans of up to £750,000 purely online.

It is also launching two new digital banks this year. The personal banking arm will be called ‘Bo’ and aims to rival newer, savvier rivals like Monzo and Revolut with an ambition to secure a 'few million' customers within the first few years of being launched later in 2019 – which can be compared to the 13.8 million current account customers it currently has in the UK. Its new commercial digital bank will be called Mettle. RBS has built both banks on completely new cloud systems rather than entangling it in its existing IT systems.

CEO succession

McEwan has a 12-month notice period and will remain in charge until a successor is appointed, with many expecting him to depart early next year as he has previously said he would stick with the bank until 2020. It is highly unlikely that RBS will reveal his permanent replacement in its Q1 results as it is too soon after the resignation. RBS has said a search of both internal and external candidates will be conducted but many have touted the current head of RBS’s commercial banking unit, Alison Rose, as an early internal favourite. It appears RBS chose to disclose the news of McEwan’s departure before releasing its earnings to mitigate any negative effects it could have on results day after shares fell on the news of his resignation.

How to trade Royal Bank of Scotland’s Q1 2019 results?

According to a Thomson Reuters poll of 22 analysts there is a long-term Buy rating on the bank (as of 16 April). Although there is a clear bullish stance on the RBS share price there is a notable number that believe the bank is adequately-valued.

The overall stance on RBS has remained broadly stable over the last three months, but the few movements in recommendation have gravitated toward Hold.

RBS shares had reached their lowest level in around a year by the end of 2018 but gained traction once its annual results were released after it beat analyst expectations. Shares rallied over 9% in the following month before giving back most of those gains. RBS shares have started to rise once again and have still gained over 6% since releasing its 2018 results.

Royal Bank of Scotland shares: broker recommendations

Broker recommendation Number of brokers
Strong Buy 8
Buy 6
Hold 7
Sell 1
Strong Sell 0
Average recommendation BUY

Royal Bank of Scotland earnings: setting the tone for 2019

There seems little doubt that 2019 will be harder for RBS than last year and there is a multitude of potential threats to the bank and its peers. Talks of economic slowdown are slowly transitioning to discussion of when the next recession will be, regulatory costs are rising and the major point of Brexit remains unresolved. While investors have embraced the progress that has been made over the last two years it seems they are keen not to get ahead of themselves.

The broker recommendation on RBS is bullish overall with a Buy rating, but there is a notable number that believe the bank is valued correctly. Although RBS has already warned over the tougher prospects it faces this year investors will be hoping the bank can issue a reassuring outlook with its Q1 results.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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