RBS promises first dividend since financial crisis

Royal Bank of Scotland declared its first dividend in 10 years despite a mixed set of first half results, but generally beating City forecasts.

The taxpayer-owned bank reported an profit attributable to shareholders of £888m for the first six months of the year, which was down 5.4% on last year. Operating profits in the second-quarter halved to £613m compared to the first quarter and the second quarter last year, but this was much better than expected, with City analysts having pencilled in a loss of £340m.

Statutory profits of £1.8bn included £810m of net litigation and conduct costs, including £1bn taken in the second quarter in respect of the US penalty to the US Department of Justice over misselling of mortgage-backed securities and £350m of restructuring costs.

Total income was fairly stable at £6.7bn for the half-year as £3.4bn in the second quarter came in higher than the £3.2m average estimate from analysts. Net interest income fell 0.9% in the second quarter to £2.5bn as stronger balance growth and deposit margins were offset by a tighter mortgage market where net interest margin fell by 11 basis points and overdraft income dropped after banks were made to increase the number of alerts sent to customers when they moved into the red.

Total net interest margin fell by 3bps to 2.01% in the second quarter compared to the first, reflecting increased liquidity and continued competitive margin pressure.

Even with the US settlement, a £2bn pension contribution and a dividend accrual of £240m, the CET 1 capital ratio stood at a healthy 16.1% at the end of the half, beating the 15.5% consensus analyst estimate.

Having dealt with several major potential obstacles to paying dividends, including the pension funding issues and the DoJ pentalty and been let off the hook by the UK regulator over its GRG unit earlier this week, directors pledged to pay an interim dividend of 2p per ordinary share. However, they said this first payout since the financial crisis was subject to the timing of the penalty payment to the DoJ.

"Over time we expect to build to a regular dividend pay-out ratio in the order of 40%," directors said, adding that they will consider further distributions in addition to regular dividend pay-outs but do not expect any such additional distributions until 2019.

The full year outlook guidance was left unchanged and reiterated guidance for the group to deliver an return on total equity of at least 12% by 2020, with statutory RoTE at 5.3% in the first half, including the impact of the DoJ settlement.

RBS shares rose 3% to 257.6p in early trading on Friday.

"RBS has made tremendous progress in addressing legacy issues over the past twelve months such that it is now in a position to resume dividend payments and plan additional capital distributions to shareholders," said analyst Gary Greenwood at broker Shore Capital.

"Despite this positive progress, the shares have been weak of late and are beginning to look more interesting to us from a valuation perspective," he added, ascribing fair value to the shares of 285p.

Capital is the "big story" this quarter, said UBS. Despite announcing and providing for the DoJ settlement and providing for a £2bn contribution to the pension fund, RBS' CET1 ratio was around 2% or £4bn or 13% of market cap higher than where it was expected to settle.