(Alliance News) - Royal Bank of Scotland Group PLC on Friday reported a sharp drop in first-quarter profit, as it was forced to significantly increase its credit impairments to cope with the fallout from the Covid-19 pandemic.
Over the past week, London's blue-chip lenders have taken a total GBP7.50 billion in credit loss impairments. On Friday, RBS contributed GBP802 million of this.
In the three months to March 31, the state-backed lender's operating pretax profit nearly halved to GBP519 million from GBP1.01 billion in the same period the year before.
Attributable profit for the first quarter came in at GBP288 million, down 59% from GBP707 million a year before.
RBS recorded GBP802 million in impairment losses in the quarter, up from GBP86 million a year before. The credit losses represents 90 basis points of gross customer loans, compared to 11 basis points the year before.
The significant rise, RBS said, was to cover the "more uncertain economic outlook".
Net interest income was down 4.4% year on year at GBP1.94 billion from GBP2.03 billion. Total income was up 3.9% however at GBP3.16 billion.
The bank's net interest margin worsened to 1.89% from 2.07% a year before. The lender's falling margins were blamed on continued structural pressure in the mortgage business, as front book margins remain below back book, and on the contraction of the yield curve.
RBS total loans to customers ended the quarter at GBP351.3 billion, up from GBP306.4 billion at the same point in 2019.
Net lending increased by GBP13.1 billion in the first quarter across the Retail and Commercial units, driven by mortgage lending in UK Personal Banking and an GBP8.0 billion increase in Commercial Banking, reflecting the rise in issued revolving credit facilities in response to Covid-19 uncertainty.
Customer deposits rose 8.3% year-on-year to GBP384.8 billion from GBP355.2 billion.
RBS's CET1 ratio at the end of March was 16.6% versus 16.2% a year before. Risk-weighted assets were down 2.9% year-on-year to GBP185.2 billion, but have risen 3.3% since the start of 2020.
The lender's cost-to-income ratio in the quarter improved to 58.7% from 63.4% the year before. Operating expenses decreased 5.2% to GBP1.84 billion.
Within divisions, RBS UK Personal Banking total income was down 8.0% at GBP1.15 billion in the quarter. The division's operating profit fell 35% to GBP324 million.
A sharp rise in credit impairments offset a growing loan book and improved cost-to-income ration. UK Personal Banking, however, also recorded a worsened net interest margin ratio, as blended front book margins of around 110 basis points remain lower than the back book margin of approximately 140 basis points.
In Commercial Banking, total income was down 6.5% to GBP1.01 billion. The division's posted an operating loss of GBP37 million compared to a GBP437 million profit a year before.
Within Commercial Banking, RBS took a GBP435 million impairment loss. This offset an GBP8.0 billion rise in its loan book over the first quarter.
NatWest Markets - RBS's investment bank - saw total income more than double to GBP543 million. The division posted an operating profit of GBP206 million compared to a GBP62 million loss the year before.
RBS said NatWest Markets improved its performance on strong levels of customer activity and own-credit adjustments, which more than offset traded credit write-downs and hedging costs following the Covid-19 outbreak.
Looking forward, RBS said it will continue with its planned restructuring of NatWest Markets. During the quarter, RBS "started to simplify" the investment bank's product suite, including announcing that it will no longer offer client clearing or execution services for exchange traded derivatives.
Elsewhere, RBS said the deteriorating economic situation will hurt its ability to generate income.
"Whilst we are closely monitoring events and assessing potential scenarios and outcomes, reflecting the significant deterioration in economic outlook and unprecedented levels of uncertainty it would be inappropriate to provide an update on medium-term outlook at this time," RBS added.
RBS had been targeting a CET1 ratio of around between 13% to 14% in the medium to long-term and a return on tangible equity of 9% to 11%.
Shares in RBS were 3.0% higher in London on Friday morning at 113.88 pence each.
By Paul McGowan; paulmcgowan@alliancenews.com
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