The Royal Bank of Scotland (LSE: RBS) share price was rising in the run-up to the bank’s Q3 update on Thursday, but a quarterly pre-tax loss of £8m, amid news that RBS has had to set aside an additional £900m to cover last-minute PPI claims, helped push the price back down again.
It’s not just Q3 figures and PPI costs that are affecting the RBS share price, mind, as that big nasty Brexit thing is hanging precariously over the whole banking sector right now. Shares in Barclays and Lloyds, too, perked up a bit when the likelihood of Boris Johnson’s ‘out or dead in a ditch’ determination leading us over a no-deal cliff appeared to have lessened, but they’ve all started to drop back again now that yet another delay is on the cards.
Nervous
There’s clearly a lot of nervousness still hanging over the sector in general, but over RBS more specifically, I think, as the one that took the longest to get itself out of the banking crisis. RBS only managed to get back to paying a dividend last year, a full four years after Lloyds achieved the same feat (though Lloyds’ 2014 payment was only a token amount). And even then, the yield amounted to only 2.5% (whereas Lloyds managed 6.2% in 2018).
But on fundamentals alone, RBS does look like a very attractive proposition. There’s a special dividend on the cards this year, and the regular dividend is forecast to offer a 5.7% yield in 2020. That’s from a stock on forecast P/E multiples of only around nine, well below the FTSE 100‘s long-term average. That valuation does, however, depend on the bank achieving the 90% hike in earnings per share that analysts have pencilled in for the current year — looking at 2018’s results, we see a trailing P/E of 16.
Caution
RBS does say that full-year earnings should still be in line with expectations, but a couple of things make me a bit nervous. One is that Lloyds, under a bigger PPI squeeze than it ever imagined, has already curtailed its share buyback programme — of the originally planned £1.75bn, £600m has been shelved. Spare cash in the banking world is clearly getting a bit thin on the ground.
On top of that, RBS finance director Katie Murray said she thinks it would be “very brave” to assume that the full extent of the PPI hit is accurately known yet, so I think we could be in for more unexpected bad news by the end of the year.
A buy
Despite all of the uncertainty (or, rather, partly because of it and its depressing effect on the share price), I do see RBS as a good long-term buy right now. But that’s only if you can stand what I expect to be a volatile few months until the end of the year, or until Brexit (whichever comes first). And I’m increasingly confident we’ll leave the EU with a deal, ditch or no ditch.
Saying that, I still prefer Lloyds, on a similar valuation but with a few years of relative stability behind it that RBS can’t yet match.
