RBS – a loss, a delay and dividend payments kicked into the long grass say analysts

29th April 2016

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RBS losses have widened to £938m following £1.2bn one-off dividend payment to its largest shareholder the British government. The bank has also warned that it may miss deadline to divest its Williams & Glyn division with analysts saying that this means the bank is even further from restoring dividend payments. They are suggesting that mainstream investors avoid the stock for now and the Share Centre says RBS is a sell.

Graham Spooner, investment research analyst at The Share Centre, says: “Quarter 1 results show that the Royal Bank of Scotland’s net losses widened significantly beyond its loss a year ago and were bigger than analysts’ estimates. The bank posted a drop of £968m, impacted by a one-off dividend payment of £1.2bn to the UK government during an otherwise profitable quarter. Meanwhile operating profits dropped 68% to £440m compared to £1.36bn the previous year, mainly attributed to Capital Resolution and an IFRS volatility charge.

“Investors will acknowledge that these latest results continue to highlight the challenges management have in attempting to sort out inherited problems. These include the significant risk it is apportioning to the divestment of its Williams & Glyn division, which it was committed to spin off by December 2017. The bank has warned that it may miss this deadline, which had already been extended from 2013.

“The group is shifting its business towards retail and commercial banking, and the CEO’s restructuring plans will shrink the group further through to 2020. The share price has continued to fall over the last twelve months and is now close to a three-year low. We suggest still avoiding the stock as there are better opportunities to be had in the market, and for those interested in the sector, we prefer HSBC.”

Laith Khalaf, senior analyst, Hargreaves Lansdown says: “Royal Bank of Scotland has announced a rather tepid set of results, though in the circumstances investors will probably be happy they aren’t taking a cold bath.

“The bank’s income remains steady in challenging conditions, and thanks to a big drop in litigation costs, the underlying business returned to profitability. However the small matter of a £1.2 billion repayment to the government tipped the bank deep into the red overall.

“As far as litigation is concerned, RBS is far from out of the woods. A ruling from US regulators is still pending over the bank’s mis-selling of mortgage-backed securities. RBS has already set aside substantial provisions for the expected costs to come, but today warned that more will be needed.

“The bank noted significant growth in its mortgage book in the first quarter, boosted by landlords rushing to beat higher rates of Stamp Duty which came into effect in April – this fillip to the lending market won’t be repeated in the coming quarter.

“The bank confirmed it is behind schedule with its divestment of Williams and Glyn, and this announcement totally overshadows the bank’s results. The delay of the spin-off kicks dividend payments into the long grass, and probably means investors will have endured a decade-long dividend drought before the bank starts making payments again.”

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