RBS rounds off a rotten week for the Big Five banks


One of the very few things that RBS’ first-quarter results have going for them is that it was the last bank of the Big Five to report, so their ability to shock or surprise was much more limited. The pattern of higher bad loan provisions, falling net interest margins and plunging profits had already been set by HSBC, Barclays, Standard Chartered and Lloyds, although investors in RBS can at least draw some comfort from its strong capital base, as reflected by a 16.3% common equity Tier 1 (CET1) ratio, the highest figure among the FTSE 100’s lenders.

Source: Company accounts for Q1 2020

Other than that, there was little cheer on offer, as the Covid-19 outbreak and its knock-on economic effects overshadow the absence of litigation costs. RBS booked nothing at all here and between them Barclays, HSBC, Lloyds, Standard Chartered and RBS lost just £84 million to regulatory and conduct issues, the lowest figure since Q1 2014 and second-lowest since Lloyds first took a Payment Protection Insurance compensation claim charge way back in 2011.

Source: Company accounts

This would have normally given the profit and loss account a tidy boost but higher provisions for bad loans have swamped that benefit. RBS booked £802 million in loan impairments, the biggest charge since Q4 2013.

In total the Big Five banks took £7.5 billion in provisions for loan losses between them in Q1.

Source: Company accounts

The good news is that was nowhere near the $24bn swallowed by America’s four giant Main Street lenders, Bank of America, Citigroup, JP Morgan and Wells Fargo and here the UK firms may have been helped by the leeway granted by the Prudential Regulatory Authority with regards to the IFRS9 accounting standard, which means the banks do not face an immediate requirement to book hefty losses against loans impacted by the viral outbreak. However, this does beg the question of whether there are further losses coming down the line for the Big Five, despite their rigorous tests and scenario analyses, even if they are mercifully a long way from the run rate needed to match the £57 billion in loan and credit impairments booked in 2009.

Source: Company accounts. *HSBC excludes $7.349 billion goodwill impairment in Q4 2019

The bad news is that the £6.2 billion increase in loan impairments across the FTSE 100 banks helped to drive aggregate pre-tax income down by £5.1 billion, or 52%.

Source: Company accounts

Lower conduct and restructuring costs provided some support but another key drag was pressure on net interest margins. Central bank cuts to headline interest rates, as well as their efforts to manipulate yield curves and credit spreads, mean it is getting harder and harder for banks to make a return on their loan book, especially as challenger banks are still snapping at their heels for business. All five of the FTSE firms showed an erosion of net interest margins and although the average drop of 16 basis points (or sixteen one-hundredths of one percent) does not sound like much, even that adds up pretty quickly across loan books that stood in total at £2.2 trillion by the end of March.

  Q1 2018 Q2 Q3 Q4 Q1 2019 Q2 Q3 Q4
HSBC  1.67% 1.66% 1.67% 1.66% 1.59% 1.61% 1.59% 1.56%
Standard Chartered  1.59% 1.59% 1.56% 1.57% 1.66% 1.67% 1.61% 1.54%
RBS 2.04% 2.01% 1.93% 1.95% 1.89% 1.78% 1.75% 1.77%
Lloyds 2.93% 2.93% 2.93% 2.92% 2.91% 2.89% 2.88% 2.85%
Barclays UK 3.27% 3.22% 3.22% 3.20% 3.18% 3.05% 3.10% 3.03%

Source: Company accounts

Higher loan charges and lower margins forced that 52% plunge in profits and therefore drops in return on equity too. And the meagre returns on equity on offer help to explain why all of the Big Five FTSE 100 banks trade at a discount to the last stated net asset, or book, value per share figures.


Price/book Q1 2020 Cost/income ratio (%) Q1 2020 Impairment ratio (%) Q1 2020 Loan/deposit ratio (%) Q1 2020 RoTE Q1 2020 CET1 ratio Q1 2020 Leverage ratio Q1 2020
HSBC  0.66 x 57.60% 1.18% 72% 4.20% 14.60% 5.30%
Standard Chartered  0.54 x 49.70% 1.30% 103% 5.00% 14.20% 5.30%
RBS 0.42 x 57.70% 0.90% 91% 3.60% 16.60% 5.80%
Lloyds 0.42 x 54.60% 0.27% 62% 5.10% 13.40% 4.90%
Barclays UK 0.37 x 52.00% 2.23% 79% 5.10% 13.10% 4.50%

Source: Company accounts for Q1 2020

For the banks to prove that their shares are oversold, this will be the figure that they need to improve above all others, although a resumption of dividend payments once regulators and economic circumstances permit would be a boost for sentiment, too.

These articles are for information purposes only and are not a personal recommendation or advice.

russmould's picture
Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.