RBS share price: 5 things to watch in Q1 results
Royal Bank of Scotland managed to end 2018 on decent footing considering the myriad of headwinds it faced, but investors concerned about its prospects this year.
Royal Bank of Scotland (RBS) (LON:RBS) will release its first quarter trading update on Friday, with investors eager to see how the lender plans to navigate the many hurdles it faces.
In 2018, the lender managed to build on the successes it achieved in the year prior, with the lender getting back into the black for the first time since it was bailed out following 2008 financial crisis. However, there are a myriad of macroeconomic headwinds persisting this year that threaten to derail RBS’ performance this year.
The UK government still owns a 62.4% stake in RBS after reducing its holding from 70.1% via a sale in June 2018. Since then, the government has pledged to sell off its remaining stake by the end of 2023.
RBS does have the ability to purchase shares back from the government under what is known as a ‘directed buyback’ and some believe the process could be accelerated after the strong lender recorded a strong performance in 2018.
However, the fact RBS shares have lost further value since the government’s last sale, combined with the myriad of macroeconomic headwinds hindering growth across the UK banking sector, the government is unlikely to initiate another sale in the near-term.
RBS drives digital growth
RBS has pledged to invest £1 billion in 2019 with the aim of upgrading its old IT systems and rolling out new digital services and products for its customers.
Digital sales accounted for just under half of all new product sales last year, up from just 26% in 2014, with RBS launching its first fully digital service for business customers late last year, allowing existing ones to apply for loans of up to £750,000 online.
This year will see the lender launch Bo, a new digital bank that aims to compete with rivals like Monzo and Revolut, with the ambition to capture a ‘few million’ customers in its first few years. It is an ambitious goal for RBS to set, but the bank is hoping it can leverage the 13.8 million current account customers it has in the UK already to help drive growth across its digital products.
At the end of 2018, 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.
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.
Challenging year ahead for RBS
This year looks likely to pose a significant challenge for not only RBS but the UK banking sector as a whole, with investors growing increasingly concerned about a slowing global economy, trade disputes and uncertainty surrounding Brexit.
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.
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.
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