RBS disappoints investors -- where are the shares headed now?
It seems like everyone has a view on what the Royal Bank of Scotland (LSE: RBS) could and should be doing and not without some justification; as tax payers we own 83% of the bank after all.
The man on whose shoulders the taxpayer's interest rides, CEO Stephen Hester, has promised all concerned that RBS will be profitable this year-- and therefore the unwitting UK plc investors will start to see a return on their investment.
At the time of writing, though, the shares are down over 2% around 46p as Thursday's final results disappointed and the bank suffered impairment losses in the island of Ireland (both north and south).
RBS reported an overall loss of £1.1bn for the year, bigger than analysts had been expecting. But there are various reasons to be cheerful and RBS made a profit of £12m in the last quarter. Also, ignoring the charges relating to the government's asset-protection scheme, the bank's net loss would have been just £9m.
Hester still sees RBS's recovery as being ahead of schedule, and sees 2010 as a year in which big strides in risk reduction and an early return to operating profits were made.
The only question for investors, though, is whether the shares will head north or south from any given point in time.
A five-minute or five-year horizon?
Depending on whether you're a trader or an investor -- the timescales involved in your perception of this direction may be measured in five minutes or five years.
Now most of us Fools like to think we're firmly in the investment camp, discerning long-term fundamentals and acting them accordingly whilst eschewing the minute-by-minute market vagaries that pre-occupy the minds of traders.
But in RBS's case, this patently didn't work. Many of the long-term investors amongst us who focused on the bank's low, low price-to-earnings ratio and tempting yield back in 2008, ignoring wider economic concerns, came badly unstuck.
One mistake (or a few in the case of financials) doesn't make a long-term investing strategy the wrong one though.
When I wrote about RBS a year ago, I thought the shares were a contrarian's buy at 35p. I was deliberately short on detail in this analysis; RBS is a difficult company to value accurately and there are countless analysts trying to do exactly that -- so it's as much art as it is science.
Private investors have the edge
Such lack of analysis is where private investors can have the edge. In RBS's case, the further one zooms out and the longer term the horizons are -- the better in my opinion. Let the paid professionals worry over the minutiae.
On that score, RBS looks a good long-term bet. The majority of the loss incurred last year was due to an exceptional charge of £1.1bn related to the asset protection scheme, designed to insure banks against losses from bad loans.
RBS also lent £52bn to businesses between March 2010 and February 2011 (well ahead of its full-year target of £50bn) and £15bn to mortgage customers over the same period -- almost twice its full-year target, as the bank made an overall operating profit of £1.9bn compared with a £6.1bn operating loss in 2009.
Such a profitability trajectory plays into the hands of non-traders, but it will take patience. Stephen Hester has said he hopes a part sell-down by the UK government owner will become "increasingly visible and appealing", but it may take time.
The shares went over 58p last April -- while taxpayers paid an average of 50.2p per share -- so it may take time to see more clear blue sky over and above that level at which, presumably, the government would be very happy to sell. The government has said it will sell its stake in RBS, but is unlikely to do so until the Independent Commission on Banking reports its findings in September.
The long-term picture for RBS looks likely to be a slimmed down and much more modest animal than the rampant ravaging tiger it was trying to be under previous CEO Sir Fred Goodwin. "Fred the Shred" made his name by the NatWest takeover and lost it with the ill-fated takeover of ABN AMRO.
In doing so, it also looks likely to be highly profitable and for those with long-term horizons, a share price sub 50p will seem like an excellent hindsight opportunity.
More from David Holding:
> David owns shares in RBS.
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