Revenues below consensus, expenses higher than consensus, impairments significantly below consensus. Result: figures that please the market.
Well, that how we’re reading Friday’s third quarter results from state-controlled RBS:
On a quarterly basis, RBS’s overall impairment charge fell by 32 per cent, while charges for impairments in its “non-core” assets (which include some Irish real estate lending) have halved.
Admittedly, that does excludes another Eurozone sovereign debt hit. Recall, in Q2 RBS marked the value of its Greek bonds to prices in the market, writing them down by 50 per cent of notional value, taking a £733m hit. Today, it’s taken a further impairment of £142m, writing the bonds down to 37p in the pound, according to analysts.
But it’s still an encouraging result, even though impairments at RBS’s core operations remain high and the improvement in the non-core business is flatted by a charge taken in the previous quarter.
From the results statement:
Impairments fell by 32 per cent from the prior quarter, principally due to reduced charges in Non-Core, which had recorded substantial additional provisions relating to development land values in its Irish portfolios during Q2 2011. Core impairments of 0.8 per cent of loans and advances to customers were flat with Q2 2011. Across the Group, Irish impairments fell sequentially from £1,251 million in Q2 2011 to £610 million in Q3 2011, paced by lower Non-Core impairments. Core Ulster Bank impairments remained high reflecting the difficult economic environment in Ireland with elevated default levels across both mortgage and other corporate portfolios.
…
Non Core
Impairments fell by £729 million from Q2 2011, reflecting substantial provisioning in relation todevelopment land values in Ireland during Q2 2011 not repeated in Q3 2011.
But we do have another (small) quibble about RBS’s huge assets.
Given the improvement in impairments seen during the quarter, it’s curious that the proportion of so-called Level 2 assets on its trillion pound balance sheet has risen to 84 per cent, from 81.4 per cent at the start of the year. In Level 1, asset values are based on “readily observable” market prices. Level 2 assets are based on prices in inactive markets, or on price-based models (that is, they use inputs that are based on observable market prices).
That might not sound a big rise at all, but in the context of a balance sheet that’s the size of a mid-size country… it is worth noting, we think.
Still we shouldn’t get too bogged down in such detail, reckons Britain’s Dick Bove who (surprise, surprise) is wildly enthusiastic about today’s results.
Never mind the sideshows. RBS will not be broken up. RBS will not be nationalised. RBS will not raise fresh equity capital. Despite the endless additional political and regulatory roadblocks placed in its way, against all the odds, RBS is, slowly but surely, making progress. Its 2013 15 per cent RoE target was always a joke – you know that, we know that, they know that. It is an irrelevance. It is not (and never has been) part of any rational investment thesis. Buy the stock at 0.4x tNAV, sell it at 0.8x and book the profit. We think that will take 12 months (give or take). That doesn’t solve all the Company’s issues or the UK Government’s disposal of its £45.8bn 82.2% stake, but those issues sit outside (or beyond) our investment thesis. The funny thing is, some investors who won’t buy RBS at 23p today will be piling in at 40p in a year or so. Strange that?
Certainly, a lot of bad news has been thrown at the RBS share price and a year-end rally is not out of the question, reckons Bruce Packard at Seymour Pierce.
We are also growing increasingly wary of a Central Bank liquidity driven rally in the last couple of months of the year, so that whilst our stance is negative, there may be some benefit for traders in the short term.
But beyond that? As today’s results show RBS is facing significant revenue pressures and unless the economic backdrop improves that won’t change.
Related link:
RBS drops two key performance targets – FT