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As RBS's McEwan bows out, clouds loom

As the chief executive serves his notice, Brexit uncertainty continues to loom over the UK economy - and RBS's shares
April 26, 2019

The enduring economic uncertainty caused by Brexit and the attendant effects on corporate investment and borrowing cast a pall over first quarter results from Royal Bank of Scotland (RBS). Despite maintaining annual guidance and posting a pre-tax operating profit of £1bn, some 11 per cent ahead of consensus forecasts, shares in the bank dropped 4 per cent on the earnings release, after it warned that income growth would be “more challenging in the near-term”.

IC TIP: Hold at 241p

The quarterly release was preceded by news that chief executive Ross McEwan had served his 12-month notice period after five and a half years in what chairman Howard Davies described as “one of the toughest jobs in banking”.

The New Zealander said he had decided to step aside after having “delivered the strategy that I set out in 2013” and with “much of the restructuring done and the bank on a strong and profitable footing”. Mr Davies also characterised Mr McEwan’s tenure as “one of the biggest UK corporate turnarounds in history”.

For investors, the period has not been lucrative, despite a return to profitability and the dividend list, and shares in RBS are down a third since Mr McEwan took over from Stephen Hester in October 2013.

Then again, the stock has outperformed domestic peers Barclays (BARC) and Lloyds (LLOY) over the same timeframe, and Mr McEwan can be credited with freeing the bank from the most onerous legal headaches he inherited, as well as repairing the balance sheet. In the three months to March, RBS’ common equity tier one ratio remained steady at 16.2 per cent.

But the attention is now on operating performance. While impairment provisions fell in the first quarter, profit attributable to shareholders dropped an eighth to £707m year-on-year, and average interest-earning assets fell 1.4 per cent to £436bn against the three months to December 2018. The net interest margin declined 6 basis points to 1.89 per cent following a reclassification of funding costs and an accounting change in interest for suspended accounts.

Consequently, targets to boost the return on tangible equity above 12 per cent and a cost-to-income ratio below 50 per cent by 2020 both look vulnerable. One front where Mr McEwan still exerts full control – cost reductions – continues to trend in line with an annual target of £300m.