Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) is due to deliver its first-half results on Friday 1 August, but it has already pre-empted the excitement by revealing a week in advance that it expects to report pre-tax profit of £2,652 million, up from £1,374m for the first half of 2013.
The bank put the better-than-expected performance down to a combination of “more favourable credit conditions and good results from RBS Capital Resolution“, saying that its capital ratios should receive a boost, too.
The boss seems happy
Chief executive Ross McEwan told us that “capital is stronger, costs are lower and customer activity is gradually improving“, but did caution us that the bank still faces legacy issues, including “significant conduct and litigation issues that will likely hit our profits going forward“.
RBS’s impairment losses are still falling, from £1.88bn to just £269m, with reductions across all divisions.
As for capital, the bank’s Common Equity Tier 1 improved impressively from 8.6% at December 2013 to 10.1%, and that’s getting up there with the rest of the banking sector.
And at this stage, RBS is apparently on track for £1bn in cost reductions for the full year.
Prior to this, analysts were forecasting a full-year pre-tax profit of nearly £4.4bn followed by a shade under £4.8bn for 2015, and I wouldn’t be surprised to see some hastily-updated forecasts before the full H1 results are out. The shares are on a forward P/E of 14 right now, and that should come down a bit. But it’s still likely to be high relative to its peers, with Lloyds (which is significantly further ahead) on a forward P/E of only 10.
Share price up
Those couple of analysts who issued updates on the day of the good news simply reiterated their price targets of 300-320p — but by the end of Friday 25th, RBS shares had already put on 11% to 367p.
A confirmed set of strong capital ratios could have one welcome effect — it could bring forward the day RBS pays its next dividend. The days of regular cash from RBS are but a distance memory these days, and nobody was expecting anything before the second half of 2015. But it could be well worth scrutinizing the full results when we get them for any hint of something sooner than that.
But be cautious
There’s positive sentiment aplenty right now, but with RBS shares still priced relatively highly for its sector, we should not forget Mr McEwan‘s warning that “there are bumps in the road ahead of us“.
