The Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has outperformed other UK banks and the FTSE 100, despite steadily declining core profits and net asset value. The stock had a correction at the end of January, but has since bounced back by 8% making some analysts argue for a tactical short ahead of the FY13 earnings results coming out on February 27.

UK bank relative performance 0214 RBS

Investec analyst Ian Gordon recommended that investors close their short positions against Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) in January, but now says that there is some “misplaced euphoria ahead of results,” causing him to drop his rating from Hold to Sell, leaving his price target unchanged at £3.45, compared to £3.55 now. The price has already dropped slightly since Gordon made his recommendation (down from £3.60) so it’s not clear if he would still make the same case.

Optimism attributed to faith in Royal Bank of Scotland CEO

Either way, Gordon attributes investors’ optimism to confidence that CEO Ross McEwan will introduce aggressive new measures at the strategic update next week, and while Gordon shares this confidence he disagrees on the timeline.

“We do not doubt that Ross has the courage to implement savage new cost reduction measures to underpin the recovery in earnings we expect to take hold by 2018,” he writes. Gordon’s projections have Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) return on equity passing the cost of equity in 2018, but not before then.

The problem is that RBS’s core pre-tax profits have been falling steadily since 2010, after recovering slightly from 2009 lows. Non-core profits have been improving, over the same time period, but Gordon expects them to have deteriorated sharply last quarter and for the bank to take a hit from one-off losses.

RBS profits by type 0214

If Gordon’s projections are correct, then RBS already trades at 1.0x NAV, compared to 0.9x for Barclay’s, so he doesn’t see the case for its current valuation.

RBS tnav per share 0214

Not everyone is an RBS bear

Obviously Gordon’s take on Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) is more bearish than the market’s (otherwise it wouldn’t be outperforming the FTSE 100), but not all analysts agree with his assessment. After RBS’s correction last month, Jefferies analysts gave the bank a buy rating with a £4.14 price target. While this was down from a previous target of £4.41, it’s still well above the current price. The key differences are that Jefferies analysts expect to see the value of core operations appreciate strongly when results come out and put a premium on the strength of Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS)’s balance sheet.

Gordon is less impressed, telling investors, “never mind capital; it’s an earnings problem.”