RBS Royal Bank of Scotland Group PLC

--Royal Bank of Scotland shares dropped after the lender's first-quarter income disappointed and it warned of a further drag from Brexit

--RBS beat analysts' profit forecasts but low interest rates leave it reliant on cost-cutting for future improvement

--The warning highlights the challenge for RBS's next CEO after current head Ross McEwan's surprise resignation on Thursday

By Adam Clark

Royal Bank of Scotland Group PLC (RBS.LN) shares sank on Friday after the lender warned Brexit uncertainty is set to limit business borrowing, taking the shine off its recovery under departing chief Ross McEwan.

RBS beat profit expectations for the quarter but revenue of 3.04 billion pounds ($3.92 billion) fell more sharply than expected from the year-earlier period.

"While we retain the outlook guidance we provided in the 2018 annual results document, we recognize that the ongoing impact of Brexit uncertainty on the economy, and associated delay in business borrowing decisions, is likely to make income growth more challenging in the near term," RBS said.

Mr. McEwan has been more vocal about the effects of Brexit than some of his peers in the U.K.'s banking sector, with RBS setting aside GBP100 million last year for higher expected loan losses.

While the U.K.'s planned exit from the European Union has now been delayed until the end of October, the British Chamber of Commerce has warned business investment is set for its biggest fall in 10 years in 2019 even if a Brexit deal is secured.

RBS's first-quarter net profit fell to GBP707 million from GBP808 million due to the lower income. Analysts also pointed to continuing pressure on RBS's net interest margin, the difference between what it earns on lending and pays out on deposits, which declined to 1.89% from 1.95% in the preceding quarter.

"This will reflect competition for deposits and loans from established rivals, as well as challenger banks and fintech start-ups, but also the unintended consequences of central bank policy and near record-low interest rates," Russ Mould of investment platform AJ Bell said.

RBS shares fell as much as 5% in morning trading, making it the worst performer on London's FTSE 100 and dragging down peers Lloyds Banking Group PLC (LLOY.LN) and Barclays PLC (BARC.LN).

The slip compounds losses from Thursday when Mr. McEwan unexpectedly announced his resignation after five-and-a-half years leading the bank. His tenure was marked by RBS's return to profitability nearly ten years after the financial crisis and its return to dividend payments.

While Mr. McEwan's successfully led a huge restructuring effort to refocus RBS on its domestic markets, the bank is still majority-owned by the U.K. government and reliant on slashing costs to improve profitability. RBS said on Friday it remains on track to achieve GBP300 million in cost cuts this year.

RBS has now begun the search for its next chief executive, with head of commercial-and-private banking Alison Rose widely tipped as the favorite to become the bank's first female CEO.

Write to Adam Clark at adam.clark@dowjones.com

(END) Dow Jones Newswires

April 26, 2019 08:09 ET (12:09 GMT)

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