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Earnings

Earnings review: Why the RBS share price plummeted following full-year results

A jump in profits and a not-so-glitzy rebrand weren’t enough to mask a fall in dividend payouts and a grim outlook for RBS. But how will how the RBS share price fare for the rest of 2020?

RBS [RBS] would be forgiven for thinking it had some good news for investors in its 2019 full-year earnings results released on 14 February. Net profits had almost doubled — climbing 93% — and it announced a special dividend of 5p per share. The heavy loss-making investment banking arm of the firm would also be drastically reduced over the coming year.

The banks also announced that it would be significantly rebranding. Having decided it was time to shake of a recent history dominated by bailouts, losses and profit warnings, it has decided to rename itself as the NatWest Group, taking the name of its high street banks. So how have share price investors responded to the news?

 

 

 

In short, it seems traders and investors alike are less than impressed by the Valentine’s Day gifts the UK bank had to offer. RBS’s share price closed down 5.9% following its annual results announcement; while the share price is down 7.2% since market close on the 14th.

 

Dividend disappointment 

Investors were unimpressed by the special dividend, which was down from 7.5p a share last year and which came on top of a meagre 3p final dividend (also down from 2018’s 3.5p per share). It means the total yield came in at less than analysts had expected, and it also signals that in 2020 the dividend will likely be lower than in 2019.

Another concern may be the firm’s target of 9–11% return on tangible equity in the medium- to long-term. That’s little gain from the 9.8% it currently stands at, while it comes after the bank had already said in August that it was unlikely to hit its previous target of 12% in 2020.

 

Profitability boost

Compared with the bank’s recent results, those for 2019 did look positive, while also coming in higher than the majority of analyst estimates. While net profit near doubled, pretax profits were up 24% over 2019 and net profit for Q4 2019 was up near 400% over the same quarter in 2018.

The problem is, RBS is building on some terrible past results and the gains were helped by a fall in PPI payouts. Profits from interest payments were also down amid an ultra-competitive loan landscape, while Natwest Markets — the investment banking arm — made a loss of £121m

 

Market Cap£23.988bn
PE ratio (TTM)7.66
EPS (TTM)25.90
Quarterly Revenue Growth (YoY)12.40%

RBS share price vitals, Yahoo Finance, 25 February 2020

 

Looking ahead

The restructuring of NatWest Markets should have a positive business – and share price - impact in the long-term as the firm moves to focus on high street banking. It has estimated that cutting the size of its investment banking arm by half will improve returns by 8% in the medium- to long-term.

However, analysts had few positive words to add to RBS Banking Group chief executive Alison Rose’s outlook. KBW responded to the update by saying the outlook for the bank is "horrible", adding that there is "no end to the building site" at RBS, according to Reuters.

Bank of America Merrill Lynch cut its share price target for the bank to 205p from 233p. Royal Bank of Canada meanwhile cut its share price target from 230p to 200p on 17 Feb. As of 21 February’s closing price, those predictions are fairly aligned with current levels, with RBS’ stock falling to 197.75p as of 24 February close.

Rose admitted there were big challenges ahead. “We, like our customers, are living in a period of unprecedented disruption. This disruption is happening against the backdrop of a highly uncertain economic environment. UK economic growth remains subdued, compared to its historic trend, and interest rates are likely to be lower for longer,” she stated.

“This has an impact on our ability to generate net interest income. Business confidence continues to be affected by the UK’s departure from the EU as our customers await certainty over the future terms of trade.”

“This has an impact on our ability to generate net interest income. Business confidence continues to be affected by the UK’s departure from the EU as our customers await certainty over the future terms of trade” - RBS Banking Group chief executive Alison Rose

 

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