Commenting on, let alone analysing, a set of results for the year prior to the advent of Covid-19 may seem to be a pointless exercise.
But this isn’t the case when it comes to Coutts and Co.
The latest set of annual accounts posted by Royal Bank of Scotland’s main wealth management and private banking operating unit shows quite conclusively that it is possible to deliver excellent results despite a low growth environment.
Although pre-tax profits came in 6.5 percent lower than the previous year and total income only increased by 1.3 percent Coutts still managed to generate an operating margin and return on equity of 43.5 percent and 16.5 percent respectively.
Coutts boss Peter Flavel
But can Coutts repeat the trick in the year of Covid-19 and, more pertinently, the shutdown of the UK economy?
Profits at RBS Group’s private banking operations fell significantly during the first quarter as a consequence of a £25 million Covid-19-related impairment. This aside, however, both Coutts and Adam & Co performed reasonably well.
Assets under management and administration suffered a big fall as a consequence of the precipitous fall experienced by global markets during March. But loan demand as well as deposits both increased significantly during the quarter.
The good news going forward, is that global markets, and in particular, equity markets have recovered and made up a significant portion of the losses sustained during March.
The bad news is that courtesy of the lockdown the UK economy has ground to a halt. And notwithstanding the affluence of Coutts’ customers this will almost certainly impact their ability to service their loans.
The prospect of loan losses is very real even taking into account the raft of lockdown-related mitigation measures launched by the UK government. As it is, mortgage and loan payment holidays have an obvious effect on revenues.
And of course an economy in stasis is not likely to be good for loan demand (distressed loans notwithstanding).
Furthermore, despite increased emphasis on non-banking related activities, interest income still accounts for around two thirds of Coutts’ total income.
As a consequence Coutts may be much more exposed to Covid-19 than its banking-lite peers.
The situation is likely to be exacerbated during 2020 as it becomes increasingly clear that the economy is very unlikely to experience a “V-shaped” recovery.
Given the ineptitude (in this author's view) of the UK government, and its reluctance to relax the lockdown, an “L-shaped” non-recovery looks increasingly likely.
Of course a more diverse product mix should provide some mitigation.
But in Coutts’ case this could be limited.
One of the apparent anomalies contained within its full year accounts was that investment management-related income fell by 12 percent during 2019 despite a 15 percent increase in assets under management and administration.
Unless it can somehow increase revenue yield or boost asset streams significantly it does not look as if Coutts’ investment management-related activities will compensate for any shortfall in net interest income.
As it is the volume of assets managed and administered may not recover to anything like the levels recorded at the end of 2019.
Although global equity markets have recovered significantly since the lows experienced in March the recovery has been very narrowly based on the away healthcare and technology sectors. Most other sectors are still well down on where they were in March.
Other non-interest related income streams, such as payment services and card fees are unlikely to provide significant relief.
There are also potential concerns on the cost side of the equation.
Coutts has been reasonably good at controlling its own costs in recent years. But as examination of its most recent set of accounts shows it does not have full control of its cost base.
“Other administrative expenses” accounted for 58.0 percent of the cost base during 2019. And a significant proportion of these consist of charges for services provided by other RBS companies.
Furthermore “other administrative expenses” increased significantly during 2019. They grew by 11.7 percent compared with the 2.9 percent growth recorded by staff costs.
The suspicion must be that Coutts could face higher charges from other revenue challenged RBS companies during 2020.
And then there is the likelihood of additional cost increases posed by new lockdown-related working practices to be taken into account.
All this doesn’t mean that Coutts will suddenly become unprofitable. But profitability and margins will take a hit during 2020.
And this could impact Coutts' standing in the UK profitability stakes.
