Royal Bank of Scotland scored a bumper £1.3bn profit for its second quarter, it revealed today, as well as offering a special 12p per share dividend to investors.
But it warned that tough economic conditions would hit profitability into 2020, sending its share price down almost five per cent.
Read more: Barclays boosts first half profit to £3bn
RBS profit before tax rocketed from £96m this time last year to £1.3bn for the three months to the end of June. Operating profit before tax rose almost threefold to £1.7bn.
Its net interest margin dipped slightly however, from 2.01 per cent to 1.78 per cent.
Basic earnings per share soared to 11p per share – up from 0.8p this time last year.
RBS also set out to return £1.7bn to shareholders through an interim dividend of 2p per share and a special dividend of 12p per share.
Why it’s interesting
RBS profits were lifted by a £700m boost from disposing of its stake in Alawwal, a Saudi bank.
But the financial institution, still part-owned by the government after the 2008 financial crisis, warned it would be unlikely to hit its target of 12 per cent plus return on tangible equity by 2020.
“Given current market conditions, continued economic and political uncertainty and the contraction of the yield curve, it is very unlikely [we will achieve that]”, the bank said.
It remains a medium term goal for the bank.
RBS gave no update on its hunt for a successor to outgoing boss Ross McEwan.
Richard Hunter, head of markets at interactive investor, said RBS is coming back to the fold “after years in the investment wilderness”.
“In the here and now, RBS is enjoying the fruits of a decade of financial pain and re-engineering,” he said.
Hunter also pointed to a strengthening cost-to-income ratio of 57.2 per cent, but warned that challenges remain for the bank.
“Provisions for impairments remain stubbornly high and net interest margin is inevitably under pressure given the interest rate backdrop,” he said.
Hunter also pointed to the disappointing guidance for 2020, which saw RBS’ share price fall 4.6 per cent this morning to 207.2p.
“Challenges remain, some of which are outside the bank’s immediate control. In so far that the bank has weathered bigger storms, it should be equipped to address those which are on the way, and the market consensus of the shares as a buy is reflection of optimism in its prospects,” he added.
Brewin Dolpin agreed that RBS was “on a path to redemption”.
“While there are cautionary words around hitting some of it targets against the backdrop of Brexit, RBS appears to be in stronger shape,” senior investment manager Donald Brown said.
However, he warned that the bank’s share price will remain under pressure as the UK faces economic uncertainty amid the rising risk of a no-deal Brexit.
What Royal Bank of Scotland said
Outgoing chief executive Ross McEwan said:
This is a solid set of results in challenging market conditions. We have delivered our largest half-year profit in more than a decade and have announced a further £1.7 billion in dividends to shareholders, of which more than £1bn will go directly to the UK taxpayer.
Given the uncertain and competitive environment, we are focused on the areas we can control; costs are down, capital and liquidity are strong and we continue to grow lending to the real economy.
Main image credit: Getty