RBS rebounds into earnings
The stock’s 12% rebound so far this year looks vulnerable.
At least dominant UK banks have a positive—albeit measly—Bank rate of 0.75% to grapple with. Their continental rivals wallow in the ECB’s negative rate environment. Yet it is the British banks with a sizeable presence outside the country with the best underlying returns and prospects for expansion. Those dependent on a UK deposit base are also hamstrung by the impact of Brexit uncertainty on cautious consumers as well as a now palpable economic pause. The second largest domestic bank, RBS could even face a triple whammy. A botched Brexit that leads to change of government in favour of Labour threatens further government intervention, after the party signalled it would consider halting RBS’s full return to the private ownership. As such, the stock’s 12% rebound so far this year in recovery of around half of its 2018 loss, looks particularly vulnerable.
Indeed, RBS’s warnings about Brexit impact have been the most urgent among its rivals. The group added £100m in October in provisions to offset potential loan losses, specifically citing Brexit. Together with a further £200m set aside as potential compensation payments to customers mis-sold PPI, provisions wiped out the group’s third quarter (Q3) earnings. Having taken that hit, investors hope for a better showing in Q4. RBS’s annual net interest margin is expected to rebound 2.1% for the year after falling 8 basis points to 1.93% in Q3. Even so, results are unlikely to be stellar given that quarterly net interest income could fall 2%. Market optimism of an eventual breakthrough in EU-UK negotiations or, at worst, an extension of Britain’s Article 50 negotiation period have underpinned Brexit-sensitive shares like RBS in recent weeks. After the stock tumbled as much as 10% in one day last October though, investor jitters remain close to the surface.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.