Anyone looking for gratitude ought probably to choose a career other than banking.
Hardly had Royal Bank of Scotland unveiled its half-year results that were well ahead of market expectations did its share price fall.
Indeed, the RBS share performance has been on a downward track for most of the past 12 months.
Currently, the stock is trading at 203.9p as of 7 August, down from the 217.10p at which it changed hands on 1 August, the day before the interim results.
“Economic and political uncertainty”
A month earlier, on 8 July, the shares had been worth 225.80p, and six months back, on 7 February, they had traded at 240p.
True, looking at the year to date in RBS share price history, we see a dip at the start of 2019, with the stock at 216.60p on 2 January. But a year earlier, on 7 August 2018, it had traded at 252.50p.
So, what is going on?
Well, it seems that before the results, traders and investors feared the figures would be worse than they proved to be, while after the results they preferred to focus on RBS’s warnings of “continued economic and political uncertainty” in the near future and the impact this may have on the bank’s performance. Brexit is clearly a factor behind this.
All of which obscured what, in normal times, would have been a more-than-respectable set of half-year results. Against the £2.3 billion operating profit expected by the market, RBS delivered nearly £2.7 billion – a 48% rise on the first half of last year.
Operating profit is defined as the surplus on business activity after the deduction of operating expenses but before payment of interest and tax.
Costs were cut by £173 million compared with the first half of 2018 and the payroll was reduced by 3,400 full-time equivalent positions.
Strategic target remains
Net lending growth across retail and commercial business customers was 2.5%. The interim dividend was maintained at 2p a share, the same as in the first half of last year, but the additional special dividend was increased from 7.5p last year to 12p.
The bank said it had “delivered further improvements for customers” with “much more to come”.
But its net interest margin – the difference between the interest charged to borrowers and the lower interest rate paid to savers – narrowed by 0.09 of a percentage point to 2.04%.
And RBS said that the “current operating environment makes achieving a 12% return on equity by 2020 very unlikely,'' adding: “This remains our strategic target and we believe it is achievable in the medium term.”
Return on equity is defined as the return on a company’s assets minus its liabilities.
RBS is probably the best-known British casualty of the 2008 financial crisis and subsequent Great Recession. From the turn of the millennium, it embarked on breakneck expansion, most notably by acquiring the National Westminster Bank, one of the traditional “big four”, having beaten off a rival bid the Bank of Scotland, which is now part of Lloyds Banking Group.
The deal catapulted RBS into the number-two slot in UK commercial banking, second only to global giant HSBC.
The final phase of this growth spurt came in October 2007 when, as part of a syndicate involving Spain’s Santander bank and Belgium’s Fortis, RBS acquired one of the great names of European banking – the Dutch institution ABN AMRO, the latter set of initials referring to the cities of Amsterdam and Rotterdam.
Great names in banking
For a period, RBS was the largest bank in the world.
But by then, the August 2007 credit crunch had traumatised the financial world and RBS faced losses on positions it held in the credit markets. It planned to raise fresh capital, but the worsening climate of 2008 culminated in September and October of that year with the collapse of Lehman Brothers and the rescue of Merrill Lynch and other institutions.
RBS was effectively nationalised by the British Government, whose stake rose to 84% and which still stands at 62%.
For that reason, of the total £3.3 billion paid out since RBS resumed dividend payments, £2 billion will have gone to the British taxpayer.
The scale of RBS’s fall in 2008 was magnified many times by the fact that, within the wreckage, lay some of the most illustrious names in British banking.
Alongside RBS itself, an institution with the rare privilege of being able to issue its own banknotes, could be found what had been the National Provincial and the Westminster banks before their 1968 merger; the Queen’s banker, Coutts; and Northern Ireland’s Ulster Bank.
RBS retains the right to the name of the Williams & Glyn’s Bank, a NatWest subsidiary from 1970 to 1985, when it was absorbed into the main bank. In the wake of the financial crisis, Britain, as with all European Union members, was required by Brussels to find ways of “giving back” the advantage that bailed-out banks had gained over those who had not been supported.
One idea was to spin off certain RBS branches into a revived Williams & Glyn’s, but this foundered on the difficulties such a bank would have encountered in terms of financial survival.
Instead, RBS was allowed to donate more than £800 million to a fund to increase competition in British banking.
So, to the future. In the half-year results, more than a page is devoted to the “risk factors” facing RBS, including hazards relating to IT, financial resilience and legal, regulatory and conduct issues.
One of these reads: “The group faces increased political and economic risks and uncertainty in the UK and global markets.”
That covers quite a lot of ground and seems unlikely, given the recent RBS share price history, to lift the stock.