The Daily Telegraph

RBS gets back on its feet – but can it last?

- Ben Wright

The Royal Bank of Scotland’s latest results show that the lender is picking itself up from the canvas. Pre-tax profits of £1.7bn in the second quarter helped it to its first half-year net profit since 2014. The bank is still likely to suffer a loss for the whole of this year but a profit in 2018 is starting to look eminently doable. There remain a number of hurdles to RBS paying a dividend – not least the fact that Brussels hasn’t yet rubber-stamped the new plan for restructur­ing Williams & Glyn. But the possibilit­y of a payout for RBS’S long-suffering shareholde­rs is no longer as remote as it once was.

Risk weighted assets have fallen by £12.4bn. Costs have been cut by £1bn a year for the last three years and are forecast to fall by another £2bn over the next four years. Most importantl­y, the bank’s common equity tier one ratio – the best measure of a bank’s balance sheet strength – has risen to 14.8pc.

RBS is a simpler, safer bank. It is also almost exclusivel­y focused on its home market. Roughly 80pc of all income is generated in the UK and the bank is aiming for this proportion to hit 90pc by 2020. This renewed focus on the UK would be the right strategy even if it hadn’t been a Government directive. But it is something of a double-edged sword, especially at this point in the economic cycle.

This can be seen from one of the few numbers going the wrong way in RBS’S otherwise impressive set of results: its net interest margin. Banks basically make money by borrowing at lower rates than they lend. The net interest margin is the difference between the two and, from the bank’s point of view, the fatter it is the better.

RBS’S net interest margin declined from 2.24pc in the first quarter of the year to 2.13pc in the second. Most of this decline was down to what the bank called “a conscious build-up in liquidity”. This means putting cash aside, which RBS is doing because it knows that it has got a whopping bill in the post: an impending fine from the US Department of Justice over the mis-selling of mortgage-backed securities. RBS has already set aside £6.6bn to pay this (and it could be more). That money obviously can’t be put to work earning more lucrative rates and this has a knock-on effect on the net interest margin.

The remainder of the squeeze came from “competitiv­e pressure”, a function of the fact that the big four – RBS, Lloyds, Barclays and HSBC – are duking it out with something like 40 upstart challenger banks.

This reverses a trend over the past five or six years during which time UK lenders have mostly improved their net interest margins by lowering savings rates and tweaking their funding models. Cheap money from the Bank of England has helped. But they might now be running out of room for manoeuvre. Last August, analysts at Citigroup predicted a reversal this year. They cited a number of reasons, including increased competitiv­eness in the UK mortgage market. It looks like they were right.

Ross Mcewan, the chief executive of RBS, appears pretty sanguine about these developmen­ts. He points out that the bank has compensate­d for the dip in margins by growing its share of the mortgage market.

But that in turn raises questions about RBS’S exposure to the UK at a time when the economy is looking a little shaky, and questions are being asked about the levels of consumer credit in the country as real wages are being squeezed. RBS mainly operates in the secured side of the market (although it is, for example, launching a new car financing product). And its large capital buffers will help it weather any potential storm.

RBS overreache­d in the boom years and floored the UK economy. It would be an unfortunat­e irony if the UK economy were to return the favour just as a far more domestical­ly-focused RBS was getting back on its feet.

A few home truths

The shares of housebuild­ers took a bit of a pummelling on Friday after reports suggested that the Government might withdraw its Help to Buy programme before 2021. This was a bit of a weird state of affairs: the Government released a white paper on housing in February that said it would review the future of Help to Buy; the programme was only due to run until 2021.

Some housebuild­ers are worried about the extent to which the programme is distorting the market (even though it makes them some fat profits). The extent to which the not-very-new news spooked investors proves the point. It is time for the Government to start thinking about removing the punchbowl.

‘A profit in 2018 is starting to look eminently doable for the bank’

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