The RBS share price opened lower this morning after the bank posted a third-quarter pre-tax loss of £8 million, sharply lower than analysts' expectations for a profit of £720 million.

RBS share price hit by new PPI payment

The bank made a fresh provision for the mis-selling of payment protection insurance of £900 million, which was part of the reason for the massive miss on earnings. The bank’s Natwest Markets business described trading in the three-month period as ”challenging”. Total income at the unit was £150 million, which was a 73% drop when compared with the same time period last year – insurance indemnity recoveries were largely to blame for the poor performance at the operation.

Total income for RBS was £2.9 billion, which undershot the consensus estimate of £3.52 billion. Lending is a core component of the bank’s business, and it is worrying that net interest margin dripped to 1.97%, from 2.02% in the previous quarter. There isn’t much RBS can do about the depressed interest-rate environment, as it is a product of the move lower in gilt yields.

Costs escalate as income falls

Costs have clearly ramped up in the last three months as the third-quarter cost-to-income ratio was 92.9%, while the year-to-date figure was just 67.5%. RBS confirmed the retail and commercial businesses saw income slide by 3.1%, which adds to the sour sentiment. The firm needs to keep a handle on expenses as the banking sector as a whole is finding it tougher to make money in the lower interest-rate environment. Lower income plus higher costs is an undesirable combination.  

RBS' strong first half

The bank made progress in the first half, but the cautious outlook in relation to Brexit took the shine off the positive numbers. In the six-month period, the company saw a 48% jump in first-half pre-tax profit. Net earnings were £2 billion, which was the strongest level since the credit crisis. Adding to that, the firm announced it would be paying out a total dividend of £1.7 billion. The figures paint a positive picture of the bank, plus it underlines how far the company has come since the global financial crisis.

The UK government owns 62% of the bank, so it received over £1 billion on account of the dividend. At the height of the banking crisis, Westminster pumped in over £45 billion to save the bank from going under. In the grand scheme of things, the recent dividend is relatively small when compared with the bailout figure, but at least the taxpayer is clawing back some of their investment.

In August, the bailed-out bank warned that it is unlikely to meet its return on tangible equity target of 12% by 2020. Tougher trading conditions were cited for the update. Political uncertainty in relation to Brexit has had a negative impact on business investment, as well as consumer activity, which is being felt across the entire economy so RBS was more cautious in its outlook. Lending margins could remain under pressure as gilt yields have been pushed lower on account of the fear surrounding the UK’s impending departure from the EU.

Today’s third-quarter update was disappointing but at least the bank maintained its full-year outlook so the bearish move in the RBS share price hasn’t been too bad – the stock is currently down 2.4% to 229p.

      

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