Profits at Royal Bank of Scotland halved in the first quarter after the taxpayer-owned bank set aside more than £800m to cover a surge of bad debts caused by the Covid-19 crisis.
RBS announced on Friday that pre-tax profits had fallen to £519m in the first three months of 2020, comparedwith just over £1bn a year earlier.
The UK government has said that these five tests have to be met before they will consider easing coronavirus lockdown restrictions:
- The NHS has sufficient capacity to provide critical care and specialist treatment right across the UK
- A sustained and consistent fall in daily deaths from Coronavirus
- Reliable data to show that the rate of infection is decreasing to manageable levels across the board
- Operational challenges including testing and personal protective equipement (PPE) are in hand with supply able to meet future demand
- Confident that any adjustments to the current measures will not risk a second peak of infections that overwhelms the NHS
Profits were hit by an £802m provision, a sum set aside to cover potential loan losses due to an economic downturn that could make it harder for its retail and business customers to repay their debts. Analysts were expecting a £515m charge, according to consensus estimates compiled by the lender.
The Edinburgh-based bank, which is changing its parent name to NatWest this year, said the group “has significant exposures to many of the commercial sectors that are already being impacted by the Covid-19 pandemic, including property, retail, leisure, travel and shipping”.
Alison Rose, the chief executive, said: “Having been involved and worked through the financial crisis, I’m aware of the importance of the financial stability and strength and liquidity of the bank which is a core priority for me.”
She assured that RBS was well diversified going into the crisis: “We’re comfortable with the level of risk on our books, including the new lending and the government schemes.”
RBS accounts for the largest proportion of lending through the UK’s government-backed coronavirus business interruption loan scheme (CBILS), which has been widely criticised for being slow to distribute funds to struggling firms.
The bank has so far approved £1.6bn to 8,292 businesses, or 31% of the 25,262 total. RBS said it had a share of about 20% of the small and medium-sized business banking market.
The chief financial officer, Katie Murray, said while CBILS would not be hugely profitable for the lender she expected a “nominal return” from the loans.
Rose said it was inevitable that some businesses would fail during the crisis, but RBS has not yet had a surge in insolvencies or payment delinquencies as customers have taken advantage of government support.
Across the entire bank, Rose noted a slowdown in spending and a rise in deposits during the lockdown. RBS forecasts a 4.3% drop in UK economic growth for 2020.
“Of course we will suffer losses on our books as the crisis plays out, but we think it’s too early to estimate the shape and scale of the economic impacts,” Rose said.
The RBS provision brings the total loan loss charges announced by the five largest UK banks to about £7.4bn for the first quarter.
A provision of £1.4bn nearly wiped out first-quarter profits at Lloyds Banking Group, which fell 95% to £74m. On Wednesday, Barclays reported a 38% drop in pre-tax profits after taking a £2.1bn charge to cover bad debts, which it predicted could soar to £4.5bn by the end of the year.
This week HSBC warned it could end up setting aside $11bn (£8.8bn) to cover loan losses for 2020, after the pandemic hit its main markets across Asia and Europe. It reported a first-quarter charge of $3bn (£2.4bn). Standard Chartered also revealed a $962m (£776m) loan loss charge on Wednesday that pushed first-quarter pre-tax profits down 29% to $886m.
RBS, which is still 62% owned by the taxpayer after its £45.5bn bailout in 2008, also announced it was winding down its fledgling digital retail bank, Bó, months after its launch in November. It plans to fold the technology into Mettle, its digital bank for small and medium-sized business customers.
