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A tripling in Q1 profits for Royal Bank of Scotland failed to serve as the silver lining to the UK lender’s otherwise cloudy prospects, with a sharp fall in mortgage lending, and how much it will ultimately cost to settle litigation from across the Pond.
Pre-tax operating profits +70% to £1.21B easily beat consensus of £699M. Core Tier 1 capital ratio also improved by 10bp more than expected to hit 16.4% (up from 15.9% at end-17), but the majority of the earnings beat was fuelled by trading activity (£465M, up from a £198M loss in Q4) instead of commercial lending (net loans down £1.2B), pointing to a potentially unsteady foundation for RBS profits and a business mix that the bank has been trying to shift away from.
Unchanged full-year guidance despite such a comfortable earnings beat has left markets disappointed that there was no upgrade, however the volatile driver for the beat at this early stage of the year suggests the board wasn’t comfortable in doing so.
To add further uncertainty, RBS has still to settle a likely multi-billion dollar lawsuit with the US Department of Justice (DoJ) over alleged mis-selling of mortgage-backed securities (MBS), which could yet eclipse the hefty £4.5B it has already agreed to pay in related US cases. While UK rival Barclays has managed to settle with the DoJ over legacy MBS complaints, RBS is having a harder time completely untangling its legal troubles. With US authorities looking to mete out harsh punishment over selling of toxic securities, RBS could be in for further instability.
Being still majority-owned by the UK government, this and Brexit tensions surely explain the bank’s unwillingness to expand full-year guidance and the markets’ negative reaction to seemingly otherwise positive Q1 results.
Artjom Hatsaturjants, Research Analyst, 28.04.2018
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