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RBS delivers profit beat ahead of impending DOJ fine

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The Royal Bank of Scotland (RBS) reported better-than-expected figures for its first quarter on Friday while it awaits a multi-billion dollar fine from the U.S. Department of Justice (DOJ).

The Edinburgh-headquartered bank’s attributable profit for the first quarter stood at £792 million ($1.1 billion), compared with £259 million for the prior year period, and was better than the £534 million expected in a Reuters poll.

It also saw a 2.8 percent increase in income and a 2.1 percent reduction in costs, excluding litigation and conduct costs. RBS also saw its mobile banking app usage grow by 21 percent from the same period last year.

Chief Executive Ross McEwan called Friday’s earnings figures “a good set of results, showing the progress we are making, despite a more competitive market.”

“Our income is up, costs are down and our capital has strengthened again,” he said.

Here are the key highlights:

  • First-quarter net profit stood at £792 million ($1.1 billion), compared with £259 million for the prior year period.
  • The bank saw a 2.8 percent increase in income and a 2.1 percent reduction in costs, excluding litigation and conduct costs.
  • Its mobile banking app usage grew by 21 percent on the same period last year.

But the positive news is overshadowed by its ongoing legal case and an impending multi-billion dollar fine from the U.S. Department of Justice (DOJ) over the bank’s selling of toxic mortgage-backed securities ahead of the 2008 financial crisis. The settlement, which is yet to be reached but expected sometime this year, has prevented the bank from providing dividends to its shareholders.

McEwan said Friday he has “given up commenting” on the timing of the settlement with the DOJ, according to Reuters.

RBS in March reached a separate settlement with the New York Attorney General in March for $500 million.

The bank in its fourth quarter of 2017 also set aside a reported £746 million for additional potential legal penalties over a personal protection insurance (PPI) mis-selling scandal, and the U.K.’s Financial Conduct Authority has set an August deadline for the PPI claims.

RBS has been more than 70 percent taxpayer-owned ever since its government bailout following the 2008 crisis. RBS came under fire earlier this year after announcing it would close 62 branches across Scotland, and was forced to partially renege on its plans and suspend 10 branch closures in response to public anger.

The bank, which is majority-owned by the U.K. government, saw its first profit in a decade last February. But uncertainty over the DOJ fine and the pending resolution of other legacy issues has prevented the government from being able to begin selling its stake.

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Risk and reward could continue to be high in FANG stocks, even if they lag this year

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Traders on floor of the New York Stock Exchange.

Source: New York Stock Exchange

Cyclical stocks that do well in a stronger economy are widely expected to lead the market higher this year, but don’t count out big tech stocks altogether — they may provide shelter in any market storm.

When the major stock indexes hit record highs across the board Wednesday, the FANG names were right there with them, leading the market higher. For the week so far, communications services is the best-performing sector, up 6% followed by tech, which has risen 4.5%.

The Nasdaq and S&P 500 closed at record highs again Thursday. Most FANG names — Facebook, Amazon, and Google parent Alphabet — continued to rise. Netflix, however, was lower Thursday after a sharp post-earnings rally.

Jack Ablin, CIO at Cresset Wealth Advisors, said retail investors are continuing to drive the big growth names higher, and he has lightened up on them despite the momentum. Earnings for big tech and FANG are expected over the next two weeks, with Microsoft on Tuesday and Apple and Facebook on Wednesday.

“Near-term, investors probably want high-quality companies that are making money,” he said. “Valuation by itself is not a timing tool and expensive stocks can get more expensive. I think they have risk. We did take some of our growth risk off the table at the beginning of the year.”

Big-cap growth is expected to lag this year, but it may be an important source of solace if the market pulls back. Many strategists say the market is overdue for a correction and it could sell off in the next couple of months. They mostly expect a fairly shallow swoon and say it should be a dip buying opportunity.

“The thing about growth is it always seems to come through in earnings season,” said Lori Calvasina, chief U.S. equities strategist at RBC. “They continue to put the numbers out. … Putting the earnings aside, I looked at the performance [Wednesday] and saw the defensive growth trade working.”

The biggest tech names, Apple and Microsoft, followed by Amazon, Alphabet and Facebook were the biggest contributors to the market’s gains last year. When the market began to rise after the sharp coronavirus pandemic-induced sell-off in March, it was those stocks that led in a broader stay home trade.

Calvasina said fears about the pandemic may be encouraging investors to put money back into growth stocks despite their high valuations. One big risk to the sector — and to the overall market — is if the companies face regulatory action. Facebook, Alphabet, Amazon and Apple are all under antitrust scrutiny in the U.S. or Europe.

Ablin is among those who expect a market pullback, and how much growth names are hurt depends on what triggers the decline.

“All things being equal and the market drops, it is going to be the FANG stocks that probably fall more. If the market drops in response to some economic disappointment then it will likely be the cyclical stocks that decline more,” Ablin said.

For now, the market is being buoyed by optimism the economy will be helped by a major stimulus package proposed by President Joe Biden, the rollout of Covid vaccines and easy Federal Reserve policy. The S&P 500 is up 2.3% so far this week.

Robert Sluymer, technical strategist at Fundstrat, is another who expects a sell-off, and he sees it coming soon.

“Our outlook remains unchanged, bullish for equities through 2021 while expecting a tactical pause/pullback to develop by mid Q1, potentially as early as month-end,” Sluymer wrote. He said weekly momentum indicators are signaling overbought levels heading into the middle of the first quarter.

“Short-term, we are expecting the S&P to push toward 3900-4000, at which point short-term trading indicators are likely to be overbought and peak,” he added. “Looking through Q1, we expect the pullback to be relatively shallow (7-10%), short lived and dominated by sector and group rotation.”

Sluymer said cyclicals are showing signs of strengthening which should continue, but he said growth stocks are showing improvement.

“After pausing through Q3-Q4 growth stocks are again timely with EBAY continuing to accelerate, NFLX surging after hours [Tuesday] from support and AMZN and CRM timely nearing support,” he noted.

Calvasina has recommended overweighting financials, materials and energy, and she is underweight communications services, consumer staples and REITs. Facebook and Alphabet are in the communications sector.

She said the growth stocks will continue to rise.

“When we look back at this year as a whole, they’re going to be up but they’re not going to be up as much as the market,” Calvasina said. She expects a shallow pullback but also says it could be worse, in the mid-double digits.

“I think it’ll be a little bit choppy,” she said. “None of our overweights … are going to work in a pullback. We think it’s one big trade. You’re going to gyrate between cyclicals and undervalued stocks, and growth.”

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Wall Street, Apple Asia suppliers, currencies, oil

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SINGAPORE — Stocks in Japan were set to trade lower at the Friday open, following yet another record session overnight for major indexes on Wall Street.

Futures pointed to a lower open for Japanese stocks. The Nikkei futures contract in Chicago was at 28,645 while its counterpart in Osaka was at 28,600. That compared against the Nikkei 225’s last close at 28,756.86.

Over in Australia, the S&P/ASX 200 dipped fractionally in morning trade.

Shares of Apple suppliers in the region will be watched after the Cupertino-based tech juggernaut’s stock stateside surged overnight. That came after a top analyst from Morgan Stanley said she expects a record December quarter print for Apple, ahead of the tech giant’s earnings..

Overnight on Wall Street, the Nasdaq Composite advanced 0.6% to close at a new high of 13,530.91 while the S&P 500 gained less than 0.1% to finish its trading day at 3,853.07, eking out another fresh high. The Dow Jones Industrial Average, on the other hand, shed 12.37 points to close at 31,176.01.

Currencies

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 90.077 following an earlier high above 90.4.

The Japanese yen traded at 103.49 per dollar, stronger than levels above 103.7 against the greenback seen earlier this week. The Australian dollar changed hands at $0.7765, having risen from levels below $0.77 seen earlier in the trading week.

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Stock futures flat to end record-setting week

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John Nacion | NurPhoto | Getty Images

Contracts tied to the major U.S. stock indexes held around the flatline Thursday evening as Wall Street appeared headed to close out the record-setting week on a muted note.

Dow futures lost 27 points while S&P 500 futures ticked slightly higher. Nasdaq-100 futures fell 5 points, or less than 0.1%.

The after-hours moves came after a strong showing from the Nasdaq Composite earlier in the day during the regular session.

The index rose to another record as investors set bets for strong tech earnings next week. The tech-heavy benchmark climbed 0.6% to close at a new high in large part thanks to a 3.7% pop in Apple shares.

The Dow Jones Industrial Average and S&P 500 both had more muted sessions, with the former dipping 12 points and the latter up less than 0.1% to eke out another fresh high.

Hopes for a robust earnings season from the country’s largest communications and tech stocks have kept the mega-cap stocks trending upward, and the major indexes near records, during the holiday-shortened week.

Apple and Facebook have risen 7.7% and 8.6%, respectively, this week ahead of their quarterly results, while Microsoft has gained 5.8%.

Wall Street’s eyes are still turned toward Washington as new President Joe Biden works to lay the early foundation of his Covid-19 and economic recovery agenda.

Investors are increasingly confident a pared-down version of Biden’s original $1.9 trillion coronavirus relief bill will be considered by Congress. Some moderate senators have expressed doubts over the need for another bill, especially one with such a price tag, less than one month after Congress passed a $900 billion stimulus in December.

Meanwhile, the Senate is expected on Friday to overwhelmingly confirm former Fed Chair Janet Yellen as Biden’s Treasury secretary. If confirmed, she would be the first woman to lead the department.

In corporate news, shares of IBM fell more than 6% in the extended session after the company reported fourth-quarter sales below where analysts were expecting. Revenue fell 6% on an annualized basis, the fourth consecutive quarter of declines.

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