RBS Alarm Bells on Brexit Challenge Sends Its Shares Sliding

(Bloomberg) -- Royal Bank of Scotland 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 Friday.

“We recognize 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 U.K.’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 U.K. 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.”

Brexit Drag

RBS isn’t the only one feeling the Brexit pinch. Barclays Plc’s U.K. 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 U.K. 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 U.K. economy, he added.

The bank is still government-controlled about a decade after its bailout during the financial crisis. McEwan, who brought the lender back to profit during his tenure, also announced his departure in 12 months from the lender on Thursday. A new CEO would likely continue the strategy of slashing costs and finding growth in a U.K. market that McEwan has described as very competitive.

Other highlights:

  • Impairments were 86 million pounds against a consensus of 165 million pounds
  • CET1, a ratio that measures capital strength, was 16.2 percent in the first quarter which was just below analyst estimates. RBS remains one of the strongest capitalized banks in Europe and plans to move close to a 14 percent target this year
  • On return on tangible equity, the bank has said it plans to move closer to a target of more than 12 percent
  • RBS said it remains on track to meet 300 million pound cost reduction target in 2019

©2019 Bloomberg L.P.

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