The Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) reported attributable losses of £9 billion for 2013, worse than the consensus £7.2 billion, dropping tNAV 16% quarter on quarter from 431p to 363p, which means that RBS is now trading at 1.0x 2013 tNAV. Revenues fell 12% year on year, and tier 1 capital ratios were lower than anticipated.
RBS had outperformed its competitors so far this year
“We currently see no relative or absolute support for Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS)’ ‘frothy’ valuation; a correction is due,” writes Investec analyst Ian Gordon, who rated RBS a Sell with a 345p price target when RBS was at 354p at yesterday’s close. Gordon’s expected correction came swiftly. RBS has fallen more than 7% today, past his price target to just 326p.
After six years of heavy losses, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has started to right itself, and Gordon thinks that CEO Ross McEwan has a good strategic plan in place, but it’s not guaranteed that the bank will post profits this year. Expecting returns to outstrip the cost of equity before 2018 is extremely ambitious.
These disappointing numbers follow outperformance by Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS), which has gained more this year than any of its UK competitors or the FTSE100, so investors had been expecting much better news than this when 2013YE earnings finally came in.
RBS could be a restructuring play now that its price has fallen
Some analysts think that focusing on the outsized losses misses the big picture, which is that Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) is in the process of restructuring and the earnings miss was driven by a £1 billion goodwill writedown. If the bank hadn’t made the writedown, and had gotten better tax benefits from litigation costs, it would have actually come in ahead of consensus. Losses from the Capital Resolution Unit, which is getting rid of the bank’s bad assets, accounted for £4.8 billion, so part of the disappointment is simply that RBS is de-risking faster than people had anticipated.
“Our thesis of balance sheet optionality (c.£100bn excess liquidity; £25bn of reserves; potential gain on Citizens IPO) remains intact,” write Jefferies analysts Joseph Dickerson and Omar Fall, who rate the bank a Buy with a 414p price target.
Gordon acknowledged that Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) could be an interesting restructuring play at a lower entry point, but he didn’t give any specifics. It would be interesting to know if today’s correction brings it within the range he would recommend, but there’s still no getting around the 69p divide between the two assessments.