RBS: Short-Term Trade or Long-Term Investment?

Published in Company Comment on 24 February 2011

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.

The future

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.

> You only have about 6 weeks left to use your tax-free ISA allowance for 2010/11. And don't forget that you can now shelter as much as £10,200 from the clutches of the taxman. So open a Motley Fool Share Dealing ISA today!

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Comments

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GeorgeMicawber 24 Feb 2011 , 6:04pm

BUT – can one trust these banks with an equity investment? Gazillions in bonus payments to themselves, but zilch for the shareholders. They will be getting into the habit of this and will they want to change it?

I was brought up to believe that the Board of Directors was there to run the company fundamentally in the interests of the shareholders, and this was the principle adhered to by the plc board I was on for 20 years. Okay you have to do the other things as well, or the shareholders will not benefit, but they should not be ignored.

The only people that the present situation serves are the staff members who get the large bonus payments, and the government – look at all the lovely tax revenue, far better than some lousy dividends!

cornytiv34 24 Feb 2011 , 6:39pm

What I would like to see is a list showing the shareholdings/bondholdings of each bank in the others. I have a feeling that this would show a "magic roundabout " of interlocking investments/guarantees, one goes down and it all unwinds. Can we trust any banks? Do they actually know the involvement they have through counter guarantees etc?.

lotontech 24 Feb 2011 , 6:51pm

Nice title, David.

My answer the question "Short-Term Trade or Long-Term Investment?" would be...

"A Long-Term Investment is a Short-Term Trade Gone Well!"

http://www.fool.co.uk/news/investing/2010/12/02/a-long-term-investment-is-a-short-term-trade-gone-.aspx

Tony.

Tykethat 24 Feb 2011 , 7:40pm

Quite simply at 45p I'm a buyer.

LeeJG 25 Feb 2011 , 1:46pm

I trust Lloyds more, they hit trouble after government arm twisting over HBOS. If I was the head of Lloyds I'd have told the government to go take a jump and let HBOS drop.

RBS are in a problem of their own making so I'll avoid them.

RobinnBanks 26 Feb 2011 , 7:00pm

Lloyds was given a Victor Blank cheque to take over HBOS without any competition inquiry, and Eric Daniels still believes it was a good move, and will prove to be eventually. If they don't split it up, it should be the best bank in Britain. Anyone buying at under £1 should be well rewarded in a few years time, and there is some talk of a dvidend this year. I wish I had known this when they were £5-£10!

I'm staying well clear of RBS. Apparently, Stephen Hester has a brief from the government shareholders to get the share price up to 75p, where he will get a bonus. I say he should aim to restore the bank to its former profitable state before any of them get a bonus. That should be the law for all banks and other businesses - no gain, no bonus!

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