In this climate I think that steering clear of Royal Bank of Scotland (LSE: RBS) remains a smart bet. Escalating fears concerning the coronavirus have sent it 4% lower in Monday trade. Its share price dropped 23% in February and those fresh drops in start-of-week business take the banking giant to its cheapest since summer 2016, below 170p per share.
There’s some symmetry to RBS’s recent dive. Its plunge to levels not seen since just after the cataclysmic European Union referendum coincides with the beginning of trade talks with the EU today. Recent trading data suggests that the FTSE 100 bank could continue to suffer from Brexit-related turbulence, too. But more of that later.
As I say, it’s concern over the spread of COVID-19 that has smacked major shares like RBS at the beginning of March. And newsflow for this particular blue chip has been particularly worrying.
Worries continue to mount
Today saw the release of refreshed economic forecasts from the OECD. It made for grim reading across the board as the body downgraded its estimates for the entire global economy (growth of 2.4% is now anticipated for this year).
However, the OECD’s update was particularly worrisome for firms with a high gearing to the UK economy. British GDP is now predicted to grow by a paltry 0.8% in 2020, down 20 basis points from the previous estimate, and giving RBS investors plenty more to chew over.
The country’s banks face another threat from the emergence of the coronavirus, too: the likelihood of more interest rate cuts. The Bank of England earlier today vowed to adopt “all necessary steps” to protect the domestic economy from the fallout.
Profitability across the sector has been crushed by ultra-loose monetary policy since the 2008–09 financial crisis. The suggestion of more rate reductions then should fill them (and their shareholders) with dread.
Brexit bashed
Clearly RBS has plenty to fear should the coronavirus spread. It already has its hands full with Brexit-related uncertainty threatening to persist through 2020 and possibly beyond.
This was illustrated in recent full-year results when it announced that impairments had shot 75% higher in 2020, to £696m. RBS saw its top line suffer, too, as Brexit concerns and intense competition hampered product demand. Net interest income dropped 7% as a consequence, to a shade over £8bn.
The bank expects more trouble in the new year, too. It notes that “in the current environment, and recognising ongoing market uncertainty, we continue to expect challenges on income.” No wonder City analysts now predict that RBS’s earnings will topple by almost a fifth in 2020.
I couldn’t care less about the company’s forward price-to-earnings ratio of below 9 times. You can forget its 8% dividend yield, too. This share’s packed with far too much risk. And things could remain difficult for the foreseeable future should trade negotiations fall flat.
