RBS rounds off weak UK bank earnings

It might not be rosy right now in the world of British banking, but the biggest players are making valiant efforts, and these are working, according to top management.

Earlier this week, Barclays CEO Jes Staley said the group’s first quarter results showed its core business was “performing well, particularly given the current environment”, despite a 33% fall in total profits.

On Thursday, Lloyds Banking Group’s CEO lauded that lender’s quarterly update. “These results demonstrate the strength of our differentiated, simple, low-risk business model and reflect our ability to actively respond to the challenging operating environment,” Antonio Horta-Osório said.

On Friday, Royal Bank of Scotland will round out the interim reporting season for UK-based banks with its own quarterly update.

No one expects it to significantly outshine the two banks who reported earlier.

Add ‘Brexit’ risk

Lloyds Bank is arguably the strongest operator from a domestic perspective, even with just 4.4% statutory return on equity (ROE) and a probable long-term decline in fee income, as packaged accounts fall from the favour of consumers and under the scrutiny of regulators.

That means pre-existing drags like low base rates, PPI provisions and other so-called legacy regulatory costs will hamper Lloyds less than its more geographically diverse rival Barclays and domestic competitor RBS.

Even so, Lloyds has still underperformed the FTSE 100 by 1.8% over the last 3 months and is down 4.5% for the year, though that is better than Barclays’ 20% fall year-to-date.

Relative underperformance looks baked in for UK banks for the long-term, whether or not investor worry over the UK’s referendum on EU membership in June, which partly explains bank share weakness, is realised with a Brexit or not.

In a Brexit, Lloyds, the largest mortgage lender would be more exposed to a house price fall than its rivals, but all banks might face the challenge of a spell without a free ‘passport’ into the trading bloc.

Assuming no Brexit, till 23rd June, the weakest bank shares will still be prone to sell-offs due to hypersensitivity to Brexit concern.

If or when Brexit is off the table, banks can get back to the business of UK banking as usual; with attendant regulatory impacts, low base rates, etc., and perceived progress, or the lack of it in unknotting their own specific headaches.

Williams & Glynn stays in for longer

For Royal Bank of Scotland (down 16.5% in 2016) headaches include the protracted disposal of its Williams & Glyn subsidiary. RBS disclosed ahead of its own Q1 update on Friday that it will not now be able to complete the sale of W&G branded branches by the end of next year. When it does get shot of the unit, “The overall financial impact on RBS is now likely to be significantly greater than previously estimated” RBS said on Thursday.

Assuming release of the news early took the sting out (RBS shares closed 3% lower on Thursday) and the group meets key Q1 expectations (according to Thomson Reuters’ average forecasts) the stock could reduce its underperformance versus the FTSE further from 6.5% currently, after ‘outpacing’ all bank shares over three months with a 1.41% fall.

• Net interest margin: 2.7% vs. 2.3% in Q1 2015
• Tier 1 Capital Ratio: 15.6% vs. 11.5% in Q1 2015
• Total income: £3bn, down 14.5% year-on-year (YY)
• Earnings before Interest and Tax (EBIT): £874m, down 43% Y/Y
• Statutory loss: £818m vs. £53m statutory pre-tax profit in Q1 2015