Morningstar | RBS Continues to Build Capital, Takes Provision Related to Uncertainty Around Brexit. See Updated Analyst Note from 26 Oct 2018
No-moat Royal Bank of Scotland continued to build its capital buffers in the third quarter as profits before tax grew to GBP 961 million from GBP 871 a year ago, although higher tax charges meant that aftertax profits fell behind last year's performance. Net interest income of GBP 2,154 million disappointed relative to last year as well as on a sequential basis owing to competitive pressures, higher average liquidity balances, and some one-off items. The net interest margin stood at 1.93%, down 8 basis points from last quarter and 19 basis points from last year. Other net interest income increased 71% to GBP 1,468 million mostly due to insurance indemnity recoveries. Higher payment protection insurance provisions due to higher-than-anticipated application volume and a GBP 100 million charge to prepare for more uncertainty around Brexit negotiations were clear negatives this quarter. We maintain our GBP 290 fair value estimate but adjust our ADR fair value estimate to $7.40 from $8.10 to account for movements in the pound/dollar exchange rate.The settlement with the U.S. Department of Justice related to missold residential mortgage-backed securities has been finalized and paid in September, bringing this chapter to an end for RBS. The amount due of $4.9 billion (GBP 3.7 billion) was fully covered by provisions taken in previous quarters. As a result, the anticipated commencement of a GBX 2 per share interim dividend has been announced as RBS has built up a comfortable cushion above its capital requirements. Currently, the common equity Tier 1 ratio is 16.7% versus a self-imposed target of 13% and is expected to increase another 40 basis points next year with the finalization of the Alawwal merger agreement. While management said it intends to distribute excess capital eventually, share buybacks and special dividends are unlikely in our view before the stress test at the end of this year and a clearer picture of where Brexit negotiations are heading.
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