Royal Bank Of Scotland's Long Road To Recovery

Published in Company Comment on 6 May 2011

RBS results please investors -- has the turnaround truly begun?

You can almost hear shareholders in the Royal Bank of Scotland (LSE: RBS) breathing a collective sigh of relief today.

The 83% state-owned bank reported a first quarter operating profit of £1,053m (ignoring tax and charges) as bad loan charges fell. Total income was down to £7.6bn from £8.2bn last year -- mainly because market conditions weren't as favourable for RBS's investment banking arm, Global Banking and Markets.

But there was still an overall net loss of £528m due in large part to a charge of £469m from a market valuation of credit insurance provided to RBS by taxpayers under the Asset Protection Scheme (APS). Such is the penalty for previous misdeeds as the banks must stump up more for funding and hold more liquidity.

The bank also suffered impairment charges of £2.0bn, including £1.3bn in relation to its Ulster Bank subsidiary, though its insurance business, which it plans to sell off, returned to profit.


RBS's chief executive, Stephen Hester, reckons the bank is showing continuing progress and the market seems to agree so far. 

The shares have responded positively to the results (which, by the way, are helpfully presented in ten separate parts as befits the bank's near public sector status perhaps!?) and are ahead by 4.3% at 42.2p at the time of writing.

What RBS didn't do was to set aside any cash to meet its probable obligations from mis-sold payment protection insurance unlike Lloyds Banking Group (LSE: LLOY) which put a jaw-dropping £3.2bn to one side for this reason as it seemed to concede defeat over the legal case brought by the banking industry body, the British Bankers' Association. 

Meanwhile, RBS says the eventual cost could prove to be "material" -- no kidding!

Overall, the results have been welcomed by the market mainly because RBS is seeing improvement in its core business and gradually reducing its exposure to riskier non-core operations as part of its five-year recovery strategy.

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Value now?

What we're really interested in trying to decide is whether the shares are a buy. As Stephen Bland has pointed out, RBS's main attraction is in its discount to book value -- an area in which it is pleasingly out of kilter with the other banks.

Stephen Hester has previously promised that RBS will turn a profit this year and the brokers see earnings per share of 2.9p, rising to 4.4p for 2012. So it may well be that the recovery in RBS shares has finally begun in earnest.

The main concern, though, is the state ownership and how and when that situation will be resolved. 

Hester has said he hopes a part sell-down by the UK government will become "increasingly visible and appealing", but it may take time. He has also said the bank doesn't expect to exit the scheme until next year. 

The government paid an average of 50.2p per share -- so may wish to see a return on its investment. But given the current political hue, I imagine the government will want out sooner rather than later.

The shares went over 58p last April, but full-year figures were generally disappointing and the shares have been falling from a recent high of 49p in February.

Trying to value RBS is no easy task for traders. When I wrote about RBS a year ago, I thought the shares were a buy at 35p though I was deliberately short on reasoning; the bank is a difficult company to value accurately and it's as much art as it is science.

But most Fools see themselves as longer term investors and on that score, I imagine anyone buying the shares around their current level and forgetting about them for a decade or so should have a pleasant surprise. It's really all about patience.

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4spiel 06 May 2011 , 1:48pm

If RBS could have bought the Dutch bank at the right price at the right time instead of the opposite then where would the shares be now.They still have assets around the globe and the shres are cheap if you have patience.

sonrisa1 08 May 2011 , 9:47am

I would buy if they were below 38P but have now bought Lloyds when they fell on Thursday now breaking even with costs! I remember telling a friend to sell RBS when they were £22 back in 2004? I am still smarting from the Labour Govt stealing Bradford & Bingly from shareholders then selling to Santander for £600,million, what thieves! & incompetant to boot. (I vote Green).

RobinnBanks 13 May 2011 , 1:10pm

I certainly wouldn't vote Brown!

If Hester and his mates took a normal wage, there would be enough to pay us a dividend.

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