The future of Royal Bank of Scotland Group PLC's investment banking arm NatWest Markets looks bleak after it contributed to forcing the state-owned lender into a third-quarter loss.
Katie Murray, RBS' CFO, said NWM would not hit previous income guidance targets.
"We are not looking to change the guidance, but when we are seeing £864 million income year-to-date and guidance of £1.6 billion, then we are not going to hit that guidance this year," she said on a conference call to discuss the bank's earnings.
Incoming CEO Alison Rose will take over on Nov. 1, and the investment banking arm is expected to come under intense scrutiny.
A 'challenged' business
"[NWM is] a challenged business and the sooner RBS can get rid of it the better," John Cronin, an analyst at stockbroker Goodbody, said in a research note.
RBS reported a loss of £315 million in the third quarter. NWM saw its total income drop to £150 million in the quarter, from £569 million in the same quarter last year. It fell to an operating loss of £193 million, compared with a profit of £87 million a year ago. Core income decreased year over year by 44.4% to £184 million.
The bank said NWM's problems were due to "challenging market conditions," especially in rates income.
"We saw significant volatility in August when [the] euro rate fell very quickly in a few days — that is what is really driving this," Murray said.
"We are focused on sterling and euro at NWM and there is not the natural set-off you get if you are focusing on the wider range of currencies."
She declined to comment on whether there would be a reduction in headcount at NWM in future, noting that the bank would talk to employees about any job losses before it would reveal that publicly.
'One quarter's performance'
RBS' investment bank is smaller than those at U.K. peers Barclays PLC and HSBC Holdings PLC. Quizzed by analysts over the future of NWM, Murray said the bank would not react to one quarter's poor performance.
"It would be foolish to react to one quarter. NWM is a business that is a 6% return on equity business, which is definitely below cost of capital," she said.
Operating expenses at NWM increased by £10 million or 3.7%, compared with the third quarter last year as a result of costs associated with becoming a stand-alone bank — RBS ring-fenced its retail operations from its investment banking arm at the start of the year.
There were also added costs involved in the opening of a branch of the investment bank in the Netherlands in preparation for a no-deal Brexit. Risk-weighted assets increased by £2.4 billion in the quarter as a result of requirements to hold higher capital or derivative assets as a result of market moves.
Over the nine months to the end of September, NatWest Markets reported an operating profit of £107 million.
"A weak print from RBS this morning predominantly owing to substantive challenges in a NWM revenue context," Cronin said. "However, a costs miss is never reassuring in this environment (2.7% behind consensus) and RBS' 3Q19 return on tangible equity of 7% is far behind the bank's double-digit ambitions."
It was the catastrophic performance of its investment banking arm at the start of the financial crisis that led to the bank taking a £45 billion government bailout, and RBS remains 62% state-owned.