EUR 850.00 For Business Accounts Only

Morningstar | Business Uncertainty Following Prolonged Brexit Hangs Over RBS' Near-Term Income Outlook

RBS reported first-quarter 2019 operating profit before tax of GBP 1 billion compared with GBP 1.2 billion the same period a year ago. Lower operating expenses, down nearly 4% year over year, were not enough to offset weaker income generation. Net interest income declined 5% to GBP 2 billion, mostly driven by NatWest markets and personal banking. Excluding one-off items in these segments, generally higher economic uncertainty and continuously high competition in the mortgage market could be seen as the underlying factors driving this performance. The Brexit delays and accompanying business uncertainty is likely to keep income generation subdued over the short-term. Non-interest income dropped GBP 152 million compared with the first quarter of 2018 and was owing to weak trading activities more than offsetting positive fee and commission income, and other operating income contributions. The cost-to-income ratio, as we calculate it, increased to 63.8% in the quarter compared with 60.9% the same period of 2018 as a result of weaker income generation. The impairment provision ratio climbed to 11 basis points compared with 2 basis points at the end of 2018, which is however, in line with 10 basis points in the first quarter of 2018. We maintain our fair value estimate of GBX 290 per share and no-moat rating.

Return on tangible equity of 8.3% was below the 9.4% of the same period in 3018 but is ahead of our full-year target of 6.6%. We highlight however that RBS expects to incur about GBP 1.5 billion of strategic costs in 2019, of which only GBP 195 million were booked in the first quarter.