FTSE extends losses and Royal Bank of Scotland is stuck in limbo

“Investors are in a celebratory or a concerned mood depending on which data you look at,” says Russ Mould, Investment Director at AJ Bell.

“The US has just seen its best month for stocks since 1987 thanks to central bank support and the market becoming more hopeful about companies getting back to work and reviving the economy.

“In contrast, the UK yesterday saw its worst daily loss in a month on the FTSE 100 as investors balked at Royal Dutch Shell cutting its dividend, weak corporate earnings from other big names including Lloyds, and negative economic news from Europe.

“The FTSE extended losses on Friday as investors turned their backs on mining, travel and financial stocks. Weighing on stocks were renewed tensions between the US and China with Donald Trump claiming to have evidence that coronavirus started in a Chinese lab, thus stoking fears that another trade spat will emerge.

“Also weighing on sentiment was a warning from Amazon that Covid-19 would wipe out its profits. Its shares have been racing ahead in recent weeks, yet the update provided a reminder that even supposed ‘winners’ during the pandemic are still taking a financial hit when factoring in additional costs.”

Royal Bank of Scotland

“Royal Bank of Scotland is used to catastrophe. Probably the worst impacted major bank in the financial crisis a decade or so ago, the company knows what it is to suffer in a downturn.

“This may explain why the company already had such a large capital buffer in place, bolstered by its regulator-influenced decision to pull its dividend.

“The company won’t and, arguably due to the Government’s 60% stake, can’t stop lending as it does its bit to support the economy. This also means giving repayment holidays and being understanding with borrowers.

“Given taxpayers bailed out the bank in 2008, it only seems right that the favour is returned. This will inevitably lead to an increase in bad debts and this is reflected in the impairments taken in the first quarter – up nine-fold year-on-year.

“The medium-term question is where this leaves the recovery plan under recently-appointed CEO Alison Rose. The state holding in the bank is unlikely to be surrendered any time soon and the prospects of improving profitability look poor in the current context of rock-bottom interest rates and recession.

“The name may soon change to NatWest but the company will still arguably be stuck in the same limbo as it has been for the last 12 years.”

These articles are for information purposes only and are not a personal recommendation or advice.