While Royal Bank of Scotland (RBS) still faces a formidable list of challenges - including the government's apparent inability to sell its stake in the bank - an operational turnaround is undoubtedly under way. In fact, a third-quarter trading update last month revealed better news on impairments than many banking analysts had been expecting. Yet the shares - trading below full-year forecasts for net tangible assets (NTA) - are among the most cheaply rated in the sector. The scale of that relative discount could prove hard to maintain as the bank's recovery continues to gain momentum.
- Operational recovery gaining pace
- Disposals and rundowns boosting focus
- Capital adequacy no longer a concern
- Shares are cheaply rated for the sector
- Big government stake
- No dividend
Indeed, with the economy recovering quickly, last month's trading update revealed that RBS would "significantly outperform" previous full-year impairments guidance of around £1bn. Management expects to write back a net provision at its capital resolution unit - the 'bad bank' containing legacy assets - of around £0.5bn in the third quarter. And its long-troubled Irish lender, Ulster Bank, is on track to deliver a net provision writeback of around £0.3bn. Analyst Ian Gordon of broker Investec Securities thinks the news could "trigger 2014 consensus upgrades of [around] £1bn at the pre-tax level". Neither is this RBS's first positive surprise of late. In July it released an abridged version of its half-year figures a week or so early following a "better than anticipated operating performance" driven by "more favourable credit conditions".
RBS is making robust progress with efforts to focus the business, too. Last month, for example, it successfully floated a 28.5 per cent stake in US lender Citizens. While analysts were disappointed at the price - the shares were sold at a marginal discount to NTA - the move did raise around $3bn (£1.85bn) for RBS. A long list of other disposals - including 2012's sale of the aircraft leasing business, last year's disposal of RBS's interest in WorldPay and this year's disposal of the bank's equity derivatives and structured products unit - have also helped raise capital and refocus the bank.
ROYAL BANK OF SCOTLAND (RBS) | ||||
---|---|---|---|---|
ORD PRICE: | 365.7p | MARKET VALUE: | £41.4bn | |
TOUCH: | 365.6-365.7p | 12-MONTH HIGH: | 388p | LOW: 292p |
FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | na | |
NET ASSET VALUE: | 534p |
Year to 31 Dec | Pre-tax profit (£bn)* | Earnings per share (p)* | Dividend per share (p) |
---|---|---|---|
2011 | -0.77 | -18.5 | nil |
2012 | -5.28 | -55.0 | nil |
2013 | -8.94 | -86.6 | nil |
2014* | 3.52 | 14.7 | nil |
2015* | 2.20 | -1.4 | nil |
% change | -38 | - | - |
*Investec Securities forecasts, adjusted PTP and EPS figures Normal market size: 5,000 Matched bargain trading Beta: 1.4 |
The continued wind-down of the legacy book is providing a boost, too, and assets there (weighted for risk) fell a third in the year to the end of June to £44bn. Disposal proceeds, combined with a smaller asset base against which capital must be held, has helped substantially bolster RBS's regulatory capital ratios. In fact, its Basel III-basis common equity tier one ratio (comparing highest quality capital with assets, weighted for risk) jumped from a slender 8.6 per cent at the year-end to a healthy 10.1 per cent. Costs are also being addressed, and at the half-year stage underlying costs fell 8 per cent year on year.
But there's still plenty to drag on sentiment, and topping the list is the near-80 per cent stake still held by the UK government. Unlike Lloyds (LLOY), where excellent progress has been made selling down its stake, the government's strategy for exiting RBS remains unclear. That significantly reflects a share price that remains well below the government's average 500p-a-share buy-in price. Indeed, privatisation is still thought to be between three and five years away. RBS isn't likely to return to the dividend list until 2016, either.
Misconduct-related threats persist, too. At the half-year stage it announced a further £150m provision for PPI mis-selling, bringing its cumulative total to over £3bn and - with 2.5m past claims cases having now been reopened by the FCA - more PPI pain looks likely. Interest-rate product mis-selling is another worry and some analysts think RBS is materially underprovided for here: about half of the sector's cases are at RBS yet it only holds about 30 per cent of the sector's cumulative provision. The bank has also yet to settle with America's Federal Housing Finance Agency - which oversees the US secondary mortgage market - for its part in mis-selling mortgage-backed securities. A big fine related to its role in possible currency market rigging could be on the cards, too. Of course, RBS is not alone with such issues.