Summary
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.
Elsewhere executives at housebuilder Persimmon have agreed to cut their share awards after controversy over their payouts, particularly the £110m initially handed out to chef executive Jeff Fairburn.
On the economic front, eurozone inflation fell from 1.4% in December to 1.3% last month. Germany’s economy grew by 0.6% in the fourth quarter, as expected.
Back in the UK, and the Bank of England’s Dave Ramsey said in a speech in Cambridge that productivity was key for monetary policy.
On that note it’s time to close for the day. Thanks for all your comments, and we’ll be back next week.
Wall Street opens higher
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.
Here’s Reuters on the speech:
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.
“Overall, it’s the MPC’s view that the economy’s speed limit is likely to be around 1.5 percent,” the former finance ministry official said.
“That means that with very little spare capacity in the economy, even the unusually weak actual growth of around 1.75 percent over the forecast ... is still sufficient to generate excess demand,” he added in remarks...at a panel discussion with the Confederation of British Industry.
Earlier this month the BoE also said it might need to raise rates sooner and by slightly more than it had expected in November to keep inflation under control.
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
— IGSquawk (@IGSquawk) February 23, 2018
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
— Mike Bird (@Birdyword) February 23, 2018
The pound is now actually up against the dollar have been in the red for most of the day. It is ahead 0.28% at $1.3993.
Updated
UK productivity is key to monetary policy - B0E's Ramsden
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
— Sigma Squawk (@SigmaSquawk) February 23, 2018
The full quote is:
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.
Updated
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.
Meanwhile David Hillman, spokesperson for the Robin Hood Tax Campaign, has hit out at the bank’s executive pay policy in the wake of the GRG debacle:
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.
As for the Eurozone, despite the euro losing its way following a fall in inflation – down to 1.3% in January from December’s 1.4% – the region’s indices couldn’t pivot into the green. The DAX dropped 30 points, taking it back below 12500, a level it has failed to hold above all week, while the CAC also slipped 0.3%.
There is a chance that investors might be buoyed by the US open. Currently the Dow Jones is on track to jump 160 points after the bell, a move that would effectively see the index recover all of the value lost following the release of Wednesday’s hawkish meeting minutes. It’s worth noting, however, that the Dow did very well on Thursday, and that only went so far in alleviating Europe’s losses.
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.
Germany is still awaiting a new government five months after an inconclusive election in September. Chancellor Angela Merkel’s conservatives and the Social Democrats (SPD) have agreed to form a new coalition but SPD members still have the chance to veto that deal in a ballot.
Nonetheless, the flourishing economy helped the overall state budget surplus hit 36.6 billion euros ($45.07 billion) in 2017 -- its highest since reunification in 1990, Friday’s data showed.
“The German economy continues to be in good shape,” said Joerg Zeuner, chief economist at KfW state development bank. “Since 2014 it has been growing faster than the long-term trend and the strong upswing will continue this year and next.”
He said the economy had performed well in the fourth quarter despite an unusually high number of public holidays and so-called bridge days, when Germans take an extra day off between public holidays and the weekend.
The Federal Statistics Office said exports, which have traditionally propelled the German economy, climbed by 2.7 percent on the quarter and imports rose by 2.0 percent so net trade contributed 0.5 percentage points to growth.
But private consumption, which has been a key pillar of support in recent years, was stagnant -- as was gross capital investment. Neither made any contribution to growth.
The full report is here.
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.
The ECB President will hope that ongoing sluggish price increases could point towards inflation picking up sooner rather than later, while also being encouraged by booming employment figures across the eurozone.
It’s unlikely that the strategy in place will be altered just yet, but pressure may begin to mount on the ECB if next month’s reading doesn’t head in an upwards trajectory.
Eurozone inflation slips
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...
All in all, it’s been a tricky but momentous year for RBS, in which the bank has put to bed many of the legacy issues which have hampered performance since the financial crisis.
Two very big shadows still loom over RBS. One is the impending fine from the US Department of Justice, which going to take a big slice out of the bank’s 2018 profits. The other is the large taxpayer stake, which has to be sold off at some point.
That selling activity is going to put downward pressure on the bank’s share price, so until it’s materially completed, the market isn’t going to get too excited about RBS. Indeed with the price now standing at around half of the government’s breakeven point, the taxpayer’s still going to come out of this nursing a significant loss.
Ian Gordon at Investec issued a hold recommendation:
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.
Persimmon executives agree to cut share awards
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.
Now following the controversy three executives including Fairburn have said they will only take half their entitlement under a 2012 long term incentive plan. This could see their payouts reduced by around £50m, the City believes.
Mixed picture for European markets
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%.
As for the FTSE 100, it has slipped 0.14% after a mixed set of results. Royal Bank of Scotland is leading the way lower, still down 4% after its profits came in lower than expected.
British Airways owner Intercontinental Airlines has fallen around 3% after it reported full year operating profit of €3.015bn, below forecasts of €3.046bn.
But Pearson has put nearly 5% as it unveiled profits at the top end of its previous guidance, and said it was in talks to sell its US school courseware publishing business.
Bookmaker William Hill is one of the biggest fallers in the FTSE 250, down 2% despite an 11% rise in annual profits.
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...
[Chief executive] Ross McEwan may wish to keep the champagne on ice. Whilst attributable profits of £752 million versus a £7bn loss last year will catch the headlines, concerns remain in the near to medium term that could keep a lid on the share price.
We must urge caution around the investigation into mortgage backed securities by the Department of Justice. RBS says it has earmarked £3.2bn ($4.4bn) for this so far but it is likely to be significantly higher than that, based on similar DoJ investigations. RBS continues to stress that ‘substantial additional charges and costs may be recognised in the coming quarters’. Meanwhile there remain concerns around UK investigations (Libor, GRG) which will continue to weigh.
How strong is the underlying business? A key measure to determine profitability is the net interest margin (NIM) but this declined by 5 basis points to 2.13%. This is a fair bit below peers (c3%) and should temper optimism resulting from the first profit in ten years. We also see that NIM fell to 2.04% in the final quarter, evidence of a concerning downtrend, from 2.19% in the same quarter a year ago.
RBS shares fall 4% despite return to profit
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.
Indeed they have. As the market opens, RBS is down nearly 4% at 271p, making it the top faller in the FTS 100.
Updated
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.
Today this bank is a simpler and safer organisation, with colleagues now fully focused on our customers.
The agenda: Royal Bank of Scotland heads busy results day
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.
Leading the way is Royal Bank of Scotland, which says it is back in profit after ten years. The taxpayer controlled bank has made a full year operating profit before tax of £2.2bn and an attributable profit of £75m. And chief executive Ross McEwan seems pretty pleased about it:
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
— RBS (@RBS) February 23, 2018
It admits it still has a range of significant risks, including litigation with one major issue outstanding with the US Department of Justice. Further significant charges may be recognised in the coming quarters, it said.
And of course it is still being investigated over the treatment of small businesses by its GRG division, with a scathing report into the scandal published earlier this week.
Other companies reporting today include British Airways owner International Airlines Group, William Hill and educational specialist Pearson.
Elsewhere European markets are expected to edge higher at the open after a bounce on Wall Street. Here are the opening calls from IG:
European Opening Calls:#FTSE 7258 +0.07%#DAX 12523 +0.49%#CAC 5334 +0.47%#MIB 22523 +0.26%#IBEX 9916 +0.40%
— IGSquawk (@IGSquawk) February 23, 2018
But after last week’s recovery, the last few trading days have been a bit more uncertain. Michael Hewson, chief market analyst at CMC Markets UK, said:
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.
Will the prospect of rising interest rates and more importantly a move beyond the 3% level and the 2013 highs on the US 10 year mark a shift in sentiment, as concerns that rising wages and prices, may start to eat into company profit margins, and prompt a more critical eye on which companies can absorb higher costs and those that can’t.
Yesterday’s decline in US yields from a four year high of 2.95% may help explain why US markets were able to rally yesterday, and pull the US dollar lower, but the inability of US stocks to close anywhere near the highs of the day only serves to highlight the lack of conviction buyers in the market, as well as some significant indecision, quite a contrast to the complacency of January.
Elsewhere new figures from Germany show the economy grew by 2.9% year on year in the fourth quarter, as expected.
We also get January’s eurozone inflation figures and a speech from the Bank of England’s Sir David Ramsden.
The agenda:
10am GMT: Eurozone consumer price index
Noon GMT: Bank of England’s Sir David Ramsden speech
