This year’s half-time performance of Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) was so good that the Board issued a preliminary release on 25 July in advance of the 1 August results date. The shares shot up 11% on the day.
RBS reported a better-than-anticipated operating performance. Pre-tax profit was up a whopping 93% on the same period last year, and analysts now see a full-year profit of over £5bn.
Management cautioned that there will be “bumps in the road ahead” but said:
“These results show that underneath all the noise and huge restructuring of recent years, RBS is a fundamentally stronger bank that can deliver good results for customers and shareholders”.
We’re still at January 2013
RBS’s shares reached a post-financial crisis high of 368p in January 2013. Despite the progress made by the business since then, and the recent impressive 11% price rise on the day of the half-year announcement, the shares are still only trading at around the 368p level reached over 18 months ago.
In the interim we’ve seen the referendum on Scottish Independence move ever closer. The Bill was put forward in March 2013, received the Royal Assent in December and is set to take place on 18 September. Opinion polls have Yes/No votes sufficiently close for the outcome to be uncertain.
Spectre of Scottish independence
RBS has spoken about the potential impact of a vote for independence on its business numerous times, and the Edinburgh-headquartered bank reiterated its view in the recent half-year report:
“… uncertainties resulting from an affirmative vote in favour of independence would be likely to significantly impact the Group’s credit ratings and could also impact the fiscal, monetary, legal and regulatory landscape to which the Group is subject. Were Scotland to become independent, it may also affect Scotland’s status in the EU. The occurrence of any of the impacts above could significantly impact the Group’s costs and would have a material adverse effect on the Group’s business, financial condition, results of operations and prospects”.
This is pretty serious stuff, and I find it hard to believe that the market isn’t pricing in the risk of an unfavourable outcome and “a material adverse effect on the Group’s business”.
As such, I think a vote against Scottish independence in September and the disappearance of the spectre of risk (in this area at least), could give a nice boost to RBS’s shares. Especially if coupled with further good news on business progress the following month when RBS is scheduled to release third-quarter results.
We can’t expect RBS’s discount to net asset value (NAV), which currently stands at 4%, to suddenly leap to match Lloyds’ 50% premium to NAV any time soon, but a partial closing of the gap could still give a decent rise in the shares.
