Enter Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), the underdog in British banking. It’s up for grabs below tangible book value. It’s a play on rivals’ troubles, among other things. There is nothing unusual in it.
Are the Stars Aligned For RBS?
“The Royal Bank of Scotland is making a major bet that consumers in the future will do most of their banking on mobile phones or tablets,” the New York Times reported on Friday.
“Look, if it’s reported in the NYT, RBS will soon become a takeover target Stateside,” a City source promptly pointed out.
No kidding. A more digital-focused strategy is the way forward in banking and there are signs RBS is becoming a more efficient bank. There is a lot to like in both elements.
Furthermore, RBS is by far the best British bank based on its stock performance in 2014. Finally, certain non-recurring items reported on the P&L indicate that RBS may be about to turn the corner.
“Unusual Items”
At RBS, losses before taxes — but “excluding unusual items” — came in at £5bn in the 12 months ended on 31 March 2014. The total economic loss of the group was almost £8bn, however. Impairment of goodwill, restructuring charges and asset write-downs totalled about £2.3bn – the highest level since 2008.
It’s not over yet, but RBS bears the hallmarks of a business that: a) has hit rock bottom; b) and may be ready to deliver more value than its competitors. It is cheap and the future looks bright: this is what it takes to buy into it. Further upside, the bulls may argue, comes from the sale of the controlling stake held by the government, and a net income that will likely support the payout ratio.
Unusual Items At Barclays
In the last 12 months ended on 31 March 2014, Barclays (LSE: BARC) (NYSE: BCS.US) reported £1.35bn of costs related to legal settlements, which came on top of more than £700m of losses for restructuring charges and impairment of goodwill.
The P&L indicates that the bank’s net income has been constantly hit by large one-off charges in recent years. These extraordinary items could become a bigger headache and may force Barclays to revise earnings estimates at some point.
In fact, it doesn’t look like it is going to be a smooth ride for Barclays stock in weeks ahead following news concerning the “dark pool” lawsuit from the New York State’s attorney general Eric Schneiderman. The impact on earnings may be low, although it must be noted that Barclays has spent £3.95bn in legal settlements in the last three years alone.
Where the next lawsuit will come from is the obvious question.
Elsewhere, press reports on Monday suggest that Barclays is close to selling out its Spanish retail assets to a domestic buyer. Barclays is shrinking across Europe and such a strategy would help it become a leaner institution — one that doesn’t waste resources on operations that do not make their cost of equity.
Nothing Unusual At HSBC
Asset write-downs, restructuring charges and impairment of goodwill have had a minimal impact on HSBC (LSE: HSBA) over the years. In the last 12 months ended on 31 March 2014, the bank reported only $279m of losses from impairment of goodwill. Between 2009 and 2012, earnings have not been impacted by one-off charges, the P&L shows.
HSBC is no bargain, as I recently argued, but its assets appeal to buyers and the bank could raise funds in a flash if it needed to shore up its balance sheet. Its core tier one capital ratio offers reassurance. These are solid reasons why a bet on HSBC would make sense once more clarity emerges on interest rates and the outlook for emerging markets.
Until then, the underdog will continue to outperform.
