Friday 26 October 2018 7:34 am

RBS share price drops as it disappoints investors on key profitability metric

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Profits are up 10 per cent year-on-year at Royal Bank of Scotland (RBS), it said in its third quarter results today, though shares dipped as it missed a key target and set money aside to handle PPI claims.

The figures

The bank reported pre-tax profits of £961m for the quarter, up 10 per cent from £871m in the third quarter of 2017.

It meant that pre-tax profits for the year so far are £2.8bn, including a £1bn settlement with the US Department of Justice earlier this year and comes hot on the heels of RBS announcing its first dividend in a decade.

Attributable profit, which determines the dividend, was up 14 per cent year on year to £448m for the three months to the end of September, though this missed expectations of £507m.

Meanwhile basic earnings per share stood at 3.7p, a dramatic increase on the 0.8p from the previous quarter and up from 3.3p for the same period in 2017.

Revenue also grew 15.4 per cent year on year to £3.6bn for the quarter, as the bank recovered indemnity insurance recoveries of £272m.

However, operating costs increased as it set aside an extra £200m for PPI claims, and took a £100m impairment charge to guard against a “more uncertain economic outlook” as well as a £60m impairment charge for its Irish business.

Why it’s interesting

Shares fell four per cent in early morning trading on news of RBS setting aside money against the possibility of bad debt, despite RBS having announced its first dividend in a decade, giving shareholders back 2p per share.

It also confirmed it has received approval from the Dutch regulator to serve EU customers out of Amsterdam after the UK leaves the EU in March 2019.

Lee Wild, head of equity strategy at Interactive Investor, said that while profit and revenue rises were welcome, shareholders were not impressed by RBS's attributable profit missing expectations.

“Whether or not RBS made more money than many expected in the third quarter depends on which line on the income statement you look at, but whichever it is, weary investors have lost faith with RBS after these results," he said.

"Costs are always closely watched and operating expenses were up almost £300m on a year ago, including another £200m related to PPI. Further staff cuts and shrinkage elsewhere should at least partially mitigate conduct costs going forward, but the market is impatient."

He added: "Returning to the dividend list over the summer was hugely significant for RBS, but a modest yield cannot support a struggling share price.

"Success for RBS depends on Brexit and how it impacts the UK economy. Rising interest rates are typically good for bank sector margins, but an economic downturn will damage demand for more expensive loans and mortgages. Bank profits will suffer.”

What RBS said

Ross McEwan, chief executive of RBS, said: “This is a good performance, set against a highly competitive market and an uncertain economic outlook.

“We are growing lending in our target markets and are in a strong position to support the economy. We’re aware there is much more work to do and are fully focused on improving for our customers.”

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