Today’s quarterly results from RBS (LSE: RBS) show that the part-nationalised bank still has a long way to go until it starts delivering a consistently strong performance. That’s because its bottom line has slipped back into the red, with the bank posting a loss of £446m in its first quarter.
The key reasons for this are vast provisions for regulatory settlements, as well as restructuring charges. In fact, RBS has set aside £334m for the global forex rigging allegations, and another £100m for payment protection insurance (PPI) claims. In addition, there is another £453m of restructuring charges.
Clearly, these charges have impacted heavily on the company’s bottom line and, while disappointing, RBS remains profitable at the operating level, with its operating profit rising by 16% versus the same quarter last year.
A Challenging Sector
Of course, RBS is not alone in having to cope with numerous one-off charges. For example, just this week sector peer Barclays (LSE: BARC) (NYSE: BCS.US) set aside a further £800m for its part in the forex rigging probe, while PPI provisions remain an ongoing cost for the majority banks operating in the UK and, looking ahead, it appears as though there will be further costs in this space over the medium term.
Opportunities
Despite these challenges, there is considerable opportunity for long term investors in the UK banking sector. For starters, interest rates are set to remain low for a number of years, with the Bank of England itself stating that they are unlikely to rise to levels considered ‘normal’ (i.e. 4% — 5%) by 2020, and that even if interest rates are increased in 2015 or 2016, the pace at which they rise may be rather pedestrian. This should benefit the likes of RBS and Barclays as it should mean fewer bad loans as well as rising demand for new loans.
Value
In addition, there is superb value for money on offer in the banking sector. For example, RBS trades on a price to earnings (P/E) ratio of just 11.9 (using 2015’s forecast earnings), while Barclays has a P/E ratio of just 10.5 and HSBC (LSE: HSBA) (NYSE: HSBC.US) has a rating of only 11.8. All of these ratings compare extremely favourably to the FTSE 100, which has a P/E ratio of around 16, and this shows that there could be upward reratings on the cards.
Looking Ahead
Clearly, there are likely to be more fines, more provisions and more restructuring charges to come for RBS, Barclays, HSBC and the wider banking sector. As such, their share prices are likely to be relatively volatile and there could be more disappointment in the short run. However, there is tremendous opportunity for long term investors to buy in at super-low prices and, if you can only choose one of the three banks then Barclays could prove to be the best buy.
That’s because, unlike RBS, it has no government shareholding (which reduces its political risk) and trades on the lowest valuation of the three banks. Furthermore, with its bottom line set to rise by 41% this year and a further 19% next year, its current share price appears to have the greatest scope to deliver stunning capital gains over the medium to long term.
And, with HSBC having more diverse operations, a lack of a government shareholder and a more stable earnings profile, it appears to be a better buy than RBS, although the latter is still a stock that is well worth holding for long term investors.
