There are still significant issues at RBS, among them an imminent US fine for its part in the financial crisis. The shares are flying, though, reports Lee Wild.
Royal Bank of Scotland (RBS) gets a bad press. It lags progress at Lloyds Bank (LLOY) and is still 71%-owned by the taxpayer. It also faces a huge fine from the US Department of Justice for mis-selling subprime mortgages. And while third-quarter results hardly shot the lights out, there is enough here to underpin the runaway share price.
Adjusted operating profit fell to £1.24 billion in the third quarter from £1.33 billion a year ago. Strip out one-offs and adjusted pre-tax profit of just over £1 billion is 5% short of consensus estimates.
There’s further to go on cost reductions, too. However, RBS did make a reported profit before tax of £871 million and an attributable profit of £392 million, the third quarterly profit in a row and up from a £469 million loss a year ago.
Despite the £1.33 billion made in the year to date, RBS still thinks it will lose money in 2017, the tenth consecutive year of annual losses. That’s because it believes a multi-billion-dollar subprime fine will be taken in 2017.
RBS says it still expects to “be profitable in 2018”, however, and it reiterated targets for 2020. It still aims to deliver a stated return on tangible equity (ROTE) above 12% with a sub-50% cost/income ratio and an assumed common equity Tier 1 (CET1) capital level of 13%.
“We think this is consensus with stated EPS [earnings per share] of 30-33p per share,” says UBS banks analyst Jason Napier. “If successful this would put RBS on 8.8x 2020 EPS compared with the European bank index on 9.4x.”
“On our numbers RBS is trading at 11.3x 2018 EPS, 1.0x TNAV [tangible net asset value] for a forecast ROTE of 9%.”
RBS shares have risen 93% since the post-EU referendum crash – they’re up over 2% Friday. Most expect the bank to return to the dividend list next year, too, but UBS believes the shares have overshot fair value, sticking with its ‘neutral’ rating and 265p price target.
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