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With litigation and low rates, RBS is cheap for a reason

The state-owned bank posted disappointing results following a plethora of litigation costs and bad debt
August 8, 2016

Its demons won't let Royal Bank of Scotland (RBS) alone. Litigation and conduct costs amounting to £1.3bn obliterated the largely state-owned bank's pre-tax profits during the first half. These included provisions for payment protection insurance (PPI) as well as the ongoing litigation around its 2008 rights issue. Capital Resolution - the group's so-called 'bad bank' - incurred an adjusted operating loss of £983m, including a net impairment charge of £263m relating to its shipping portfolio.

IC TIP: Hold at 177.3p

The bank's net interest margin was 4 basis points higher at 2.18 per cent, driven by a reduction in lower yielding non-core assets. However, the same measure for UK personal and business banking declined to 3.07 per cent from 3.24 per cent, as secured lending increased and mortgage customers switched from to lower-rate products.

Net impairment losses more than doubled to £103m for the commercial banking segment, primarily as a result of a single name charge taken for the oil and gas portfolio. At least the investment bank recorded a £89m operating profit, compared with a loss of £488m in 2015. Operating expenses almost halved to £729m due to lower litigation costs as well as reduced headcount.

Analysts at Shore Capital expect tangible net asset value per share of 349p at December 2016, down from 352p a year earlier.

ROYAL BANK OF SCOTLAND (RBS)

ORD PRICE:177.3pMARKET VALUE:£20.8bn
TOUCH:177.3-177.4p12-MONTH HIGH:350pLOW: 148p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE: 450pLEVERAGE:19.3

Half-year to 30 JunTotal operating income (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2015 (restated)7.26261-2.2nil
20166.06-274-17.6nil
% change-16---

Ex-div: na

Payment: na