Royal Bank shares plunge after £100m Brexit charge
SHARES in Royal Bank of Scotland plunged more than four per cent after the institution booked a provision of £100 million to reflect Brexit uncertainty, wiping in excess of £1 billion from its stock market worth.
Chief executive Ross Mcewan, who in recent days has warned a no-deal Brexit could tip the UK economy into recession, denied the write-down reflected growing stress among business and retail customers, declaring that impairment levels at the bank are among the lowest in the sector.
But the provision spooked the market, sending shares spiralling as investors digested the news.
Mr Mcewan said: “You are not seeing the stress coming through into small businesses or into the retail customer book. We are just trying to be there in support of customers.”
He added: “You do have to look forward as well as backwards, and there is a lot more uncertainty in the marketplace until we do get agreement [on Brexit]. That is what this is reflecting.”
The £100m write-down at Royal will do little do quell fears in the business community that the UK is heading for a no-deal Brexit. This week the Confederation of British Industry (CBI) in Scotland warned that Brexit uncertainty was “unsettling” Scottish manufacturers, which reported their first drop in export orders for more than two years.
The Brexit provision overshadowed an increase in third-quarter profits at the bank, which climbed to £448 million in the three months ended September 30 from £392m at the same stage last year.
Laith Khalaf, senior analyst at Hargreaves Lansdown, described the £100m charge as a “Brexit blow”.
He said: “This served as a reminder the bank’s fortunes are very heavily influenced by the domestic economy, and by extension, so is its share price.”
Responding to questions from reporters, Mr Mcewan said he had become more optimistic that the UK would secure a withdrawal agreement with the European Union (EU) after taking part in a conference call with Prime Minister Theresa May last week, along with other leading company leaders.
He said: “We got a sense that there was a position that was starting to be developed that was a lot more optimistic than I’d heard in the past.”
As well as its Brexit provision, the bank booked a £60m impairment charge in its Irish business, which it said reflects ongoing sales from its loan book to reduce the level of non-performing loans.
Mr Mcewan noted the bank has increased its growth fund support for businesses by £2bn as it “awaits further clarity on Brexit negotiations”, taking the size of the fund to £3bn. Some £900m has already been deployed to companies in manufacturing, technology and development, Mr Mcewan added: “You’ve seen our strong lending position, we’ve put together our growth fund.
“We are having really good conversations with many of our business customers around their needs, particularly around Brexit and their supply chains.”
However, Mr Mcewan did acknowledge there continues to be an “investment pause” among large corporates while the Brexit negotiations play out.
He said: “We’ve called that out for the last two quarters.
“You are seeing larger com- panies just pause their investment until they get certainty.
“But nothing is showing through in our impairments.”
The bank, which remains 62.4% owned by UK taxpayers, booked £389m of litigation and conduct costs in the third quarter, compared with £782m last time. This included a further provision of £200m for PPI (payment protection insurance) compensation payments, which was sparked by a higher level of claims than expected.
Total income for the quarter climbed to £3.6bn from £3.4bn, while operating expenses dropped to £2.4bn from £2.7bn. Mr Mcewan said the move towards
“digitisation” was “taking out costs”.
After paying its first dividend in a decade earlier this month, an interim pay-out of 2p per share, Mr Mcewan said the bank was contemplating options for returning further capital to shareholders. This could include a share buyback or a special dividend. However, he said it would not be in a position to return capital until it had gone through the next Bank of England stress test later this year.
Mr Mcewan admitted the bank was focused on doing more to improve its customer service, after recently being named one of the worst performers in a survey carried out by the Competition and Markets Authority. “Our customers advocacy is not where we would like it to be,” he said.
Commenting on the third quarter overall, he said the bank had turned in a “good performance in a competitive market and with [an] uncertain economic outlook”. He highlighted the increasing strength of its capital position and noted it had expanded lending to its target markets.
Mr Khalaf added: “The latest results from RBS are a bit of a curate’s egg. The headline numbers are ahead of expectations, but this is largely a matter of one-off items toppling onto the right side of the scales. The core business is looking pretty stagnant, at best, and the bank’s interest margin is heading in the wrong direction, despite rising rates.”
Shares in Royal closed down 9.6p at 224.9p, reducing its worth by £1.16bn.