RBS boosts dividend but warns Brexit turmoil could hike costs

By Iain Withers and Lawrence White

LONDON (Reuters) - Royal Bank of Scotland announced a better than expected dividend for investors including Britain's government on Friday after its profit more than doubled in 2018, but warned Brexit turmoil would make it harder to achieve its cost-cutting goals.

The majority state-owned lender said it would pay an annual dividend of 3.5 pence and a special dividend of 7.5 pence, taking the total payout, including an earlier interim dividend, to 13 pence per share.

However RBS chief executive Ross McEwan warned the bank faced a difficult economic environment amid a "heightened level of uncertainty related to ongoing Brexit negotiations".

The bank said the political turmoil means it will struggle to hit its target of slashing its cost-to-income ratio to less than 50 percent as planned by 2020.

RBS also warned more than 50 billion euros of cross-border payments had been put at risk by a potential chaotic departure from the European Union.

The warnings on Brexit pulled down RBS shares by 0.5 percent in early trading.

RBS reported a net profit of 1.6 billion pounds ($2.05 billion), above expectations of 1.4 billion pounds, according to a company-provided average of analyst forecasts and up from the prior year's 752 million pounds.

PAINFUL DECADE

The landmark dividend payout follows a painful decade of massive misconduct and restructuring costs for the bank following its 45 billion pound state rescue in 2008.

Investors will be hopeful returns will rise further in the coming years, with the bank's core capital ratio - a key measure of a lender's resilience - coming in at 16.2 percent, giving it room to manoeuvre.

However, RBS bosses have previously cautioned that concerns over Brexit's potential impact on Britain's economy could temper ambitions to rapidly boost payouts.

The bank warned economic challenges could mean a spike in bad loans, including from major business failures.

Despite the note of caution, impairments on bad loans fell 19 percent to 398 million pounds in 2018 and the bank did not make any further provision for Brexit preparations on top of the 100 million pound charge billed in the third quarter.

RBS's second consecutive year in the black will likely intensify speculation the Treasury will act swiftly to sell more of its stock.

The lender remains 62 percent owned by British taxpayers, although the Conservative government has conducted two share sales as it looks to return it to private ownership.

The bank's net interest margin - a closely-watched measure of underlying lender profitability - increased two basis points to 1.95 percent quarter on quarter, which analysts at Goodbody said would "settle some nerves" amid investor concerns about profitability pressures on banks.

McEwan's total pay package for the year increased slightly to 3.6 million pounds, up from 3.5 million the previous year.

The lender's gender pay gap decreased slightly to 36.6 percent, down from 37.2 percent the previous year.

The bank said income at its investment banking business Natwest Markets fell 24 percent in 2018, due to challenging market conditions for its fixed income, currencies and commodities unit in the fourth quarter.

($1 = 0.7808 pounds)

(Reporting by Iain Withers and Lawrence White; Editing by Rachel Armstrong and David Evans)