The Royal Bank of Scotland Group plc
Q1 2020 Interim Management Statement
Responding to exceptional circumstances
On the 11 March 2020, the spread of the Covid-19 virus around the world was declared a pandemic by the World Health Organisation. Many countries' governments, including the UK Government, have implemented restrictions aimed at limiting the rate of its spread which have had immediate impacts on people, businesses and economies. Our purpose of 'championing potential, helping people, families and businesses to thrive' has been central to our response to the unprecedented challenges that our customers and colleagues currently face.
We remain available to support as required; our systems remain robust and we have ensured that more than 90% of our branch network remains open, alongside our telephone, internet and mobile app channels. Across the Bank, over 60,000 colleagues, including those working in call centres, are now set up to work from home. Additionally, the Bank has committed to support special leave with full pay for all colleagues for six months as required.
Following significant capital strengthening in recent years, the Bank is currently in a strong position to deal with a likely significant economic downturn. The CET1 ratio increased to 16.6% in the quarter following the cancellation of proposed dividend payments partially offset by the impact of increased RWAs. The Liquidity Coverage Ratio (LCR) remains strong at 152%.
Resilient balance sheet
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CET1 ratio of 16.6%, 40 basis points higher than Q4 2019, which includes a c.75 basis point increase associated with the release of the foreseeable dividend and pension contribution capital deductions as previously announced. RWAs increased by £6.0 billion reflecting lending growth in the retail and commercial businesses and an increase in NatWest Markets. |
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LCR remains healthy at 152%, representing £49.5 billion headroom above 100%. |
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Net lending increased by £13.1 billion in the quarter across the retail and commercial businesses driven by mortgage lending in UK Personal Banking and an £8.0 billion increase in Commercial Banking reflecting the utilisation of revolving credit facilities (RCFs) in response to Covid-19 uncertainty. |
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Customer deposits increased by £15.6 billion compared with Q4 2019 principally reflecting an £8.9 billion increase in Commercial Banking as customers sought to retain liquidity in response to Covid-19 uncertainty. |
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Q1 2020 financial performance |
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RBS reported an operating profit before tax of £519 million and an attributable profit of £288 million. |
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Total income, excluding notable items and own credit adjustments, decreased by 1.6% in comparison to Q1 2019. Across the retail and commercial businesses income decreased by 6.5% whilst NatWest Markets core income increased by 9.3%. |
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Bank net interest margin (NIM) of 1.89% was 4 basis points lower than Q4 2019 reflecting continued structural pressure in the mortgage business, as front book margins remain below back book, and the contraction of the yield curve. |
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Litigation and conduct costs include a £100 million PPI release offset by other charges. |
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Strategic costs of £131 million include a £39 million charge related to technology spend and a £34 million direct charge in NatWest Markets in respect of restructuring activity. |
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A cost reduction of £26million was achieved in the quarter excluding operating lease depreciation. The Bank's key focus is on supporting our customers and colleagues through this period of uncertainty, while preserving shareholder value, and we remain on track to deliver a £250 million cost reduction in 2020. |
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Net impairment losses of £802 million equate to 90 basis points of gross customer loans, compared with 11 basis points in Q1 2019. Q1 2020 includes a £628 million charge in respect of a more uncertain economic outlook, bringing our total multiple economic scenario (MES) overlay to £798 million. |
Loans to customers & customer deposits
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Net loans to customers increased by £24.4 billion in Q1 2020, of which £13.1 billion related to growth across the retail and commercial businesses and £7.5 billion was within central items, mainly reflecting reverse repo activity as part of treasury liquidity management. UK Personal Banking increased by £4.8 billion, with gross new mortgage lending of £10.4 billion in the quarter. Commercial Banking increased by £8.0 billion reflecting the utilisation of RCFs in response to Covid-19 uncertainty. |
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Customer deposits increased by £15.6 billion compared with Q4 2019 principally reflecting an £8.9 billion increase in Commercial Banking as customers sought to retain liquidity in response to Covid-19 uncertainty. |
Between 31 March 2020 and 23 April 2020:
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UK Personal Banking gross new mortgage lending was £1.3 billion largely reflecting re-mortgage business as the level of new business in the UK market reduces. |
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As at 23 April, RBS has extended repayment holidays to over 190,000 mortgage customers. |
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Since the inception of the Coronavirus Business Interruption Loan Scheme (CBILS), £1,376 million loans have been approved. |
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RBS has facilitated £3,105 million of Covid-19 Corporate Financing Facilities (CCFF) issuances by the Bank of England on behalf of our customers. |
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Support under the Coronavirus Large Business Interruption Loan Scheme (CLBILS) has commenced and as at 23 April 2020, £29 million of loans had been requested. |
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Commercial Banking has provided gross new lending of £2,015 million to support our customers, including £501 million to Large Corporates & Institutions, £420 million to SMEs & Mid Corporates and £623 million to Real Estate. |
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Utilisations of RCFs in Commercial Banking have stabilised at around 40% of committed facilities following the increased drawdowns in Q1 2020. |
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RBS International has, as at 23 April 2020, supported 1,418 personal customers with mortgage or loan repayment breaks and new overdraft facilities and 413 business customers with loan repayment breaks or working capital facilities. |
RBS had £68.6 billion of undrawn and off-balance sheet exposure at default (EAD) as 31 March 2020 (31 December 2019 – £71.1 billion).
Dividends
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As announced on 1 April 2020, RBS has decided not to undertake interim dividend payments or share buybacks, take no charge in CET1 for foreseeable dividends and to defer decisions on any future shareholder distributions until the end of 2020. In response to a formal request from the Prudential Regulation Authority, the Board has also decided to cancel the final ordinary and special dividend payments in relation to the 2019 financial year. The Board remains committed to capital returns, will continue to review the situation and will look to resume distributions to ordinary shareholders in due course. |
Outlook(1)
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As outlined in our 2019 Annual Report and Accounts, the central economic forecast supporting our corporate plan was in line with the December 2019 consensus view. This assumed average UK GDP growth of c.1.6% from 2019 to 2023, with a 25 basis point cut in the Bank of England Base rate in 2020. Clearly this position has deteriorated sharply in recent weeks and the conditions facing the UK economy, along with the associated government and regulatory response, are unprecedented. The outlook is now subject to significant uncertainty and we will continue to refine our internal forecast as the economic position evolves.
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2020 Outlook |
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The latest outlook for central bank rates to remain at historic lows and flat yield curves will adversely impact the Bank's income generation. As noted above, the Bank's corporate plan assumed a 25 basis point rate cut in 2020 compared with the recent reductions of 65 basis points. In addition to the impact of ongoing market uncertainty, and in line with the guidance in our 2019 Annual Report and Accounts, we continue to expect that regulatory changes will adversely impact income in our personal business by around £200 million. Whilst we remain committed to our £250 million cost reduction target, achieving planned reductions in the current environment is likely to prove more challenging although this will be mitigated by rebalancing of the investment pool and other cost saving initiatives. We now expect strategic costs to be at the lower end of our previous guidance of £0.8-1.0 billion for the year. We retain the longer term commitment to re-shaping the Bank to be fit for the future and driving sustainable success In Q1 2020 our impairment loss rate was 90 basis points of gross customer loans. We expect the full year 2020 loss rate will be meaningfully higher than our guidance of below 30-40 basis points. The impacts of Covid-19 and the mitigating benefits of government schemes are uncertain and challenging to forecast accurately. At this time it would be inappropriate to provide full year loss rate guidance. We expect to achieve lending growth of greater than 3% across our retail and commercial businesses, given the significant increase in lending during 2020 to date. Given the current uncertainty the level of risk weighted assets (RWAs) at the end of 2020 is very likely to exceed the £185-190 billion range we previously guided to. We do however continue to target a reduction in NatWest Markets RWAs to around £32 billion by the end of 2020 and expect to achieve this with lower income disposal losses than the £0.4 billion previously guided to, subject to market conditions. RBS Group maintains its capital and funding issuance guidance as set out in the 2019 Annual Report and Account, subject to market conditions and any changes in the 2020 balance sheet profile. |