2014 has been a positive year for investors in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US). That’s because, while the FTSE 100 has fallen by 3% since the turn of the year, shares in RBS have surged by 10% as market sentiment has improved rapidly following a number of years of doubts and uncertainty.
Encouraging Results
A key reason for the uplift in sentiment has been encouraging results. Indeed, quarterly results released today by RBS show that it has delivered a third successive quarter of profitability, with profit before tax being almost £1.3 billion for the quarter. This is some turnaround from the same quarter last year, where RBS posted a loss of over £600 million.
Furthermore, RBS’s capitalisation ratios are also on the up, with its tier one capital ratio improving by a hugely impressive 220 basis points since the end of 2013, and being up 70 basis points during the third quarter of 2014. In addition, RBS continues to make strong progress in its efficiency drive, being able to shave 5% off adjusted operating expenses in the quarter and remains on-track to deliver £1 billion in operating cost reductions in 2014.
Of course, the quarter also included £400 million set aside to cover potential fines for manipulating currency markets, as well as a further £100 million for PPI payouts. Clearly, such costs are not yet out of the bank’s system, but it seems to be making great progress in terms of bottom line growth.
Valuation
While RBS deserved to trade at a significant discount to its net asset value when the UK and global economies were experiencing a deep crisis, it’s becoming more difficult to justify it at a time when economic growth is on the up. Indeed, RBS continues to trade on a price to book ratio of just 0.4, which means that £1 of net assets can be purchased for just £0.40.
When there was tremendous uncertainty as to the value of the bank’s asset base, this was easy to explain. However, with RBS continuing to deliver impressive levels of profitability and global economic growth in a much stronger position than in recent years, shares in RBS could see their valuation rise over the medium term.
Looking Ahead
While RBS is not yet able to put the PPI mis-selling and currency manipulation issues behind it, this is a bank that is well on the road to long term recovery. Although the sale of the government’s stake may be seen by many investors as a potential problem, if the bank is performing well and appears to be undervalued then it could experience strong demand for its shares. Certainly, three successive quarters of profit is still early days but, nevertheless, RBS appears to be a highly attractive investment opportunity at the present time.
