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RBS’ 2020 vision blurs

Deteriorating market and economic conditions mean the lender will “very likely” miss next year’s targets
August 2, 2019

European bank executives are in a bind. If they fail to set ambitious targets, many investors will simply look at monetary and economic conditions and walk. But those ambitions are beholden to those same rough conditions, as Ross McEwan and his team at Royal Bank of Scotland (RBS) were forced to acknowledge in the lender’s half-year results. 

IC TIP: Hold at 207p

Owing to the contraction of the yield curve, domestic woes and “current market conditions”, RBS revealed it is now very unlikely to achieve its 2020 target of a return on tangible equity above 12 per cent, or a cost-to-income ratio below 50 per cent. That revelation sent its shares down 6 per cent, drowning out the applause one might normally expect of a £1.45bn, 12p-a-share special dividend.  

In truth, there are already signs the targets look stretched. Though the group’s headline return on tangible equity more than doubled to 12.1 per cent in the six months to June, this was largely due to a £444m gain stemming from its holding in Alawwal bank, which completed its merger with Saudi British Bank at the end of the period. The knock-on effect on the second-quarter cost-to-income ratio – which dropped to just 52.6 per cent – looks more like a mirage than a trend.

Consensus forecasts are for earnings of 27p a share this year, rising to 30.4p in 2020. 

ROYAL BANK OF SCOTLAND (RBS)  
ORD PRICE:207pMARKET VALUE:£25bn
TOUCH:206.5-207.2p12-MONTH HIGH:266pLOW: 194p
DIVIDEND YIELD:2.7%*PE RATIO:9
NET ASSET VALUE:382pLEVERAGE:18.3
Half-year to 30 JunTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)*
20186.701.837.42.0
20197.122.6916.92.0
% change+6+48+128-
Ex-div:15 Aug   
Payment:20 Sep   
*Excludes special dividends of 12p (2019 HY) and 7.5p (2018 FY)