RBS set to pay ‘healthy’ dividends
But bank has to first settle mortgage-bond probe with US authorities
LONDON: Royal Bank of Scotland Group Plc (RBS) signalled its potential to pay dividends for the first time since the financial crisis, once legacy issues are resolved, with stronger-than-expected capital in the third quarter.
The Edinburgh-based lender’s common equity Tier 1 ratio, a measure of financial resilience, jumped to 15.5% in the period from 14.8% at the end of June, it said in a statement yesterday, beating analyst estimates.
“RBS looks set to deliver decent, clean, sustainable profitability in 2018 and beyond, and a healthy dividend,” said Sandy Chen, an analyst at Cenkos Securities, who upgraded the stock to buy from hold after the results. “The group can convincingly point to a decently profitable 2018 – if the US authorities aren’t too greedy with their fines and settlements.”
Four years into his tenure, chief executive officer Ross McEwan is making headway in turning around the recipient of the biggest banking bailout during the financial crisis. But the firm is still hampered by past misconduct charges and needs to settle with the US Department of Justice (DOJ) over a mortgage-bond probe before it can return dividends and entice investors to buy the government’s 71% stake.
The CEO told reporters on a call on Friday that he is “optimistic” of a DOJ settlement this fiscal year.
“Certainly, dialogue has picked up with the DOJ over the last quarter or so,” chief financial officer Ewen Stevenson said separately on a call with analysts.
RBS has said that it would pay dividends once uncertainty over legacy issues had been removed. The bank reiterated that it will be profitable in 2018.
Still, with only two months to go to the end of the year, the lender hasn’t received an opening offer from DOJ, and some analysts, including David Lock at Deutsche Bank AG, have seen a risk that the settlement could fall into 2018. In a note to clients this month he estimates that a further £3.5bil (US$4.6bil) of charges could be required for the DOJ settlement.
RBS is up 26% this year in London trading and rose to the highest since January 2016 after the results. The shares climbed 0.7% 283 pence at 10.23am.
McEwan made some steps forward in the bank’s return to normality this year, with an agreement in July to pay US$5.5bil to the US Federal Housing Finance Agency to settle a lawsuit alleging RBS sold faulty mortgage bonds to Fannie Mae and Freddie Mac from 2005 to 2007.
RBS has also gained approval from the European Union for an alternative plan to boost competition after failing to sell its Williams & Glyn unit, a condition of its 2008 bailout.
The bank’s adjusted operating profit, which excludes certain one-time items, fell 6% to about £1.25bil from £1.33bil in the same period a year earlier.
That beat an approximate £1.04bil estimate of four analysts surveyed by Bloomberg News.
RBS, which has focused more on mortgage lending than unsecured consumer credit said its net interest margin declined to 2.12% in the quarter from 2.17% a year earlier.
Its Natwest Markets unit, which houses the trading business, posted a 24% drop in revenue to £401mil in the quarter from a year ago. The previous period had benefited from higher client activity and “favorable market conditions” following Brexit, it said. — Bloomberg