Royal Bank of Scotland spooked markets today as it set aside £100 million to cover the potential damage Brexit could do to the business next year.
The state-backed bank, led by chief executive Ross McEwan, put the cash aside as a precaution after rocky negotiations between the UK and EU increased the risk of a bad outcome from Brexit.
The figure represents the risk that customers struggle to repay their loans as a result of an economic downturn.
“There is a lot more uncertainty in the marketplace at the moment until we get agreement. That’s what this (£100 million charge) is reflecting,” said McEwan. The shares fell 4.5%, or 10.5p, to 224p.
RBS finance chief Katie Murray said the bank had to include more “downside” scenarios in its financial models due to the rising uncertainty from the talks, which have failed to come up with a solution.
RBS is forced to predict the economic impact on its profits under new accounting rules known as IFRS 9 and put money aside to cover possible loan impairments.
The £100 million could be returned to RBS’s coffers if the economic picture is healthier than expected. RBS has a £320 billion loan book and an existing provision of £3.9 billion.
Markets were spooked by the charge, which came on top of an extra £200 million top-up to pay PPI and a £60 million hit on Irish loans.
Jefferies analyst Joe Dickerson said the charge had not been “explained well” and was “at odds with the actions of other banks operating in the same market”.
The pessimism was at odds with McEwan, who praised the “optimistic tone” of Brexit negotiations following a conference call with Prime Minister Theresa May last Friday.
“We are not seeing stress coming through into the small business and the retail customer book,” he said, adding that loan impairments were running below forecast.
The bank’s capital buffers improved from 16.1% to 16.7%.
Shareholders are expecting a bumper windfall from the bank after it restarted the dividend in August.
Once a stress test from the Bank of England is complete in December, the bank is expected to start handing back its cash mountain to shareholders.
McEwan said it was working through options, including assessing buybacks and special dividends, but he wanted to get through the stress test first.
The net interest margin was hurt by the mountain of cash, falling to 1.93%, worse than analysts had expected.
Adjusted pre-tax profits of £1.63 billion were well ahead of forecasts, mainly due to a £272 million payment made by insurers for RBS’s litigation costs.
