February 23, 2018
Royal Bank of Scotland has moved back into profit after nine years of losses, prompting chief executive Ross McEwan to hail “a symbolic moment”. But the bank has not included provisions for potential fines from the US Department of Justice, which are likely to knock results in the coming months.
In other big UK results, there were positive reactions to Pearson but less so for British Airways owner International Airlines.
US markets have followed up Thursday’s gains with a strong opening on the last trading day of the week.
The Dow Jones Industrial Average is currently up 186 points or 0.75%, while the S&P 500 opened up 0.57% and the Nasdaq Composite is 0.7% better. A dip in bond yields, which eased from recent highs after Federal Reserve member James Bullard seemed to warn against too many interest rate rises this year, helped lift share prices.
The impact of Brexit on UK productivity growth will continue for some time, according to the Bank of England’s Dave Ramsden. In his speech in Cambridge, he said:
The dampening effect of Brexit on productivity growth – both through the effect of uncertainty on business investment in the short run and through the need to anticipate and respond to post-Brexit trading relationships – is likely to continue for some time.
Uncertainty about the extent to which Britain’s weak rate of productivity growth will improve over the coming years is a key factor for monetary policy, Bank of England Deputy Governor Dave Ramsden said on Friday.
Ramsden – one of two policymakers to oppose November’s rate rise – repeated some of the language used after the central bank’s February Monetary Policy Committee meeting.
Here are IG’s opening calls for US markets:
US Opening Calls:#DOW 25147 +0.74%#SPX 2723 +0.70%#NASDAQ 6816 +0.78%#IGOpeningCall
Looks like a mini flash crash in the pound, soon recovered:
Sudden unexplained drop in the pound, one of the more liquid emerging market currencies. Most of the drop already recovered. pic.twitter.com/Uf1M23g1qO
Bank of England deputy governor Dave Ramsden is speaking on productivity in Cambridge:
BoE’s Ramsden: The weakness of and uncertainty around the path of UK productivity is a key consideration for monetary policyhttps://t.co/Q9HJMNXOhz
Productivity – how much output an economy can produce using a given amount of input, such as output per hour worked – is a key determinant of the evolution of inflation, and it is one of the most important factors affecting the outlook for the UK economy and a therefore a key issue over the MPC’s policy horizon. That is particularly true now.
RBS of course has been heavily criticised for the attitude to business customers shown by its GRG division .
And the Federation of Small Businesses believes the bank should re-invest some of its profits in helping smaller firms. National chairman Mike Cherry said:
The branch closures announced by RBS at the end of last year are set to limit access to banking for small firms all over the UK. Time that business owners spend travelling to and from bank branches that are miles away is time not spent running and growing their firms.
Now that RBS is profitable again, it should look closely at how it can support the communities it’s threatening to leave behind with waves of branch closures. The bank has benefitted from public support over the years. It’s important that it now returns support to the public and small businesses.
RBS might claim to have turned the corner, but with jaw-dropping losses of almost £60bn this is a horror story not a success story.
With the spectre of massive US fines looming and the details of the bank’s disgraceful mistreatment of customers revealed, it’s horrifying that RBS, which is still over 70% publicly owned, can somehow find £3.5m to dole out to its CEO Ross McEwan.
More on Royal Bank of Scotland, and a worst case scenario in terms of the US Department of Justice fine is not expected, says Ken Odeluga, market analyst at City Index:
RBS’s first headline profits this decade and a hint that dividends are “closer” have not been enough to trigger shareholder applause. The outstanding mortgage-backed securities case is too much of a worry. Lack of a clear update on the Department of Justice litigation means pay-outs are unlikely to start in 2018—dividends can’t be paid before the government has sold its 71% stake.
But Friday’s share price reaction doesn’t assume the worst-case scenario. The loss of about $2.1bn in market value implies RBS is expected to pony up more than the $4.4bn it had set aside by the end of last year. But the total would still be around half the most pessimistic charge expected. It would be painful, but absorbable, given RBS’s key capital buffer had strengthened to 15.9% by the end of the year, the highest ratio amongst UK rivals. The scenario does of course require the DoJ to stick to its pattern of mandating settlements below the highest possible; usually contingent on humble co-operation (hello, Barclays). But the scenario is a plausible base case. And it would still allow RBS a tentative path to growth and shareholder returns.
Markets remain in the doldrums, although they have come off their worst levels. Connor Campbell, financial analyst at Spreadex, said:
Despite the prospect of a positive US open the European markets couldn’t shake their losses this morning.
With RBS investors more concerned with the impending DoJ [fine] than the bank’s first profit in a decade, IAG slipping after missing full year earnings and the pound up 0.2% against the euro, the FTSE had little reason not to wallow in the red this Friday. And wallow it did, with the UK index dipping 0.3% to lurk below the 7250 mark it has struggled around all week.
Much earlier, Germany released its latest growth figures, and here is the Reuters take:
Foreign trade drove a 0.6 percent expansion in Europe’s largest economy between October and December, German data showed on Friday, and the momentum from the fourth quarter is widely expected to carry over into the start of 2018.
The data, which confirmed a preliminary reading, shows the German economy ended last year on a strong footing despite unaccustomed political uncertainty in a country that prides itself on its stability.
Back with the eurozone inflation figures, and Kay Daniel Neufeld, managing economist at the Centre for Economics and Business Research, said:
Given the recent trajectory of inflation in the Eurozone and the stubbornly low levels of core inflation, the members of the ECB’s Governing Council are indeed well-advised to be patient and not withdraw monetary stimulus measures too early or too rapidly. Looking at the year ahead, Cebr identifies two main downside risks to the future trajectory of inflation and the Eurozone economy more broadly.
Firstly, the strengthening euro could act as a serious headwind to Eurozone exporters as well as dragging inflation rates down. In unusually clear language the ECB minutes criticised the US and warned of competitive currency depreciations following remarks by US Treasury secretary Steven Mnuchin, who claimed a weak US dollar was good for the American economy. The second risk for the ECB is a slowdown in the global economy and the Eurozone more specifically as the current economic upswing runs out of steam. While this is unlikely to happen in the first half of the year, early indicators hint at a levelling out of the growth cycle. Growth in air freight volumes has moved sideways since August 2017 hinting at a possible cooling of the current world trade boom. In January, the European Commission’s consumer confidence index slipped, albeit from record-high levels. Political risks persist as well; the Italian election on Sunday will in all likelihood unsettle the Eurozone’s third-largest economy for some time and important question on Eurozone reform will remain up in the air at least until coalition talks in Germany are successfully concluded.
Here’s an interesting read for eurozone aficionados -a Financial Times interview with Bundesbank boss Jens Weidmann, favourite to take over from Mario Draghi as the president of the European Central Bank. The article, part of the Lunch with the FT series, is here (£).
The EU inflation figures could mean more pressure on the European Central Bank, says Dennis de Jong, managing director at UFX.com:
This morning’s inflation reading highlighted there’s still work to be done to reach the ECB’s target of 2%, after figures echoed market expectations at 1.3%.
While Mario Draghi has tempered expectations of reaching the ECB’s target within the first quarter, he’ll be eager to see positive movement with the second quarter on the horizon.
Eurozone inflation has come in at 1.3% in January, in line with expectations and down from 1.4% in December.
In the wider European Union, the rate was 1.6% compared to 1.7% in December, according to statistics agency Eurostat. It said:
The lowest annual rates were registered in Cyprus (-1.5%), Greece (0.2%) and Ireland (0.3%). The highest annual rates were recorded in Lithuania and Estonia (both 3.6%) and Romania (3.4%). Compared with December 2017, annual inflation fell in twenty-one Member States, remained stable in one and rose in six.
In January 2018, the highest contribution to the annual euro area inflation rate came from services (+0.56 percentage point), followed by food, alcohol & tobacco (+0.39 pp), energy (+0.22 pp) and non-energy industrial goods (+0.15 pp).
European markets may be drifting lower but Wall Street is forecast to open higher.
After Thursday’s 164 point rise on the Dow Jones Industrial Average, the futures are indicating a similar opening when trading starts this afternoon.
More on RBS. Laith Khalaf, senior analyst at Hargreaves Lansdown, said:
RBS has broken its ten year duck and managed to squeeze out a profit in 2017, thanks in large part to a big fall in litigation and conduct costs. This is a stay of execution rather than a pardon however, because the bank is still facing a multi-billion dollar penalty from the US Department of Justice, which is now going to impair profitability in 2018.
The UK part of RBS is going great guns, and even the investment bank has held up reasonably well, considering a lot of the bad bank has been rolled into it. The bank’s capital position has improved again, though the prospect of a dividend still hinges on the final settlement with US authorities…
With a widely anticipated top-up provision for any US DOJ settlement de facto “deferred” until 2018e, RBS has delivered a full-year profit for the first time in ten years (2017 attributable profit +£752m). In the fourth quarter of 2017, underlying profit before tax of £512m was a £195m (28%) miss versus consensus, and guidance for 2018/19 restructuring charges is raised from around £1bn to £2.5bn. Nevertheless, we still dream of a return to private ownership in 2024e.
Housebuilder Persimmon has been in the middle of a row over excessive executive pay – not least over a £110m bonus awarded to chief executive Jeff Fairburn.
Fairburn recently said he would give some of the money to charity, although he would not spell out how much.
Predictions of opening gains for European shares have not exactly panned out.
France’s Cac is up 0.23%, Germany’s Dax is up 0.25% but Spain’s Ibex is down 0.06%.
Neil Wilson, senior market analyst at ETX Capital, also points to the US Department of Justice investigation. He said:
Not quite ten in a row – after nine years and £50bn in losses since the financial crisis, RBS is back in the black – for the moment at least.
A return to profit for RBS but the underlying strength of the business remains a bit of a doubt and with major legacy issues still unresolved it’s hard to get a firm read on where profits will be in the medium term…
RBS is back in profit partly because it has not yet taken a provision for US mortgage mis-selling, says Gary Greenwood at Shore Capital:
RBS has reported full year results to 31st December 2017 which show adjusted profitability slightly below our own and consensus forecasts, but with a much stronger than consensus expected year end core tier 1 ratio (albeit slightly below our own forecasts). In addition the group reported its first statutory attributable profit in a decade, albeit this was largely thanks to the fact that a settlement with the US DoJ (Department of Justice) regarding historical US RMBS (Residential Mortgage Backed Securities) mis-selling has yet to be reached. The outlook statement notes the group has made a positive start to 2018F, but warns that the pace of investment in the business needs to be increased to support its transformation, resulting in a slower pace of operating cost reduction in 2018F and significant incremental restructuring charges versus previous guidance. Overall, we expect the shares to respond negatively to this news.
Here’s more from the bank on GRG:
The bank has received significant media attention for its treatment of some small business customers between 2008 and 2013. To those customers who did not receive the experience they should have done while in GRG we have apologised. We accept that we got a lot wrong in how we treated customers in GRG during the crisis. However, these were complex and subjective cases with each case having unique facts about what was the right thing to do. The bank welcomes the FCA’s confirmation that the most serious allegations made against the bank have not been upheld and that the steps the bank announced in November 2016 to put things right for customers are appropriate.
We have made significant progress in improving our culture since then.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It may be a Friday but the corporate world is having a final splurge of results before the weekend.
This is a symbolic moment for this bank and a clear indication of the progress we continue to make in putting the past behind us, while at the same time investing to build a bank which delivers for both customers and shareholders.
RBS 2017 results have now been released. Read the details here: https://t.co/LMDVfEIAXW pic.twitter.com/ThJCFpSAgq
European Opening Calls:#FTSE 7258 +0.07%#DAX 12523 +0.49%#CAC 5334 +0.47%#MIB 22523 +0.26%#IBEX 9916 +0.40%
That we haven’t seen any sort of follow through from last week’s gains should be a bit of a worry and probably speaks to a wider concern that the current down move in stocks may not be quite over.
Investors appear to be wrestling on the horns of a dilemma in the wake of this weeks Fed minutes which suggested that the prospect of four Fed rate rises this year might not be outside the realms of possibility, despite FOMC member and St. Louis Fed President James Bullard’s warnings about being too aggressive on the hiking cycle yesterday.
Source: The Guardian