Can RBS’s third quarter measure up?

Royal bank of Scotland Group will announce its third update on Friday 31 October.

An RBS branch
Source: Bloomberg

At the end of September the bailed-out bank issued the good news early and stated its third-quarter update would be ahead of analysts’ estimates. The group also noted its loan impairments would be ‘significantly’ lower than originally estimated.

A recovery in the UK and Irish housing markets has helped the turnaround in the once toxic loan book. The bank expects £800 million in positive contributions from write backs on distressed loans.

The Scottish-based bank once considered offloading its Irish division Ulster Bank, but Friday’s update is expected to confirm RBS’s commitment to its operation in Ireland. The boom and bust of the Irish property market in recent years has contributed its fair share of write downs in relation to loans. However, the recovery has helped Ulster bank eke out small profits in the first two quarters of this year, and traders are expecting a positive revision of £300 million owing from loan impairments.

RBS is 81% owned by the government, and the next general election is just over six months away. Westminster has no plans to reduce its stake in the bank before votes go to the polls in May, and the bank is believed to be three to five years away from being privately owned.

Much of the focus on RBS has been on the retail side of the bank. Last month's announcement stated that revenues from investment and corporate banking would not meet previous guidance.

In February, the bank stated it would greatly reduce its headcount over the coming years by as much as one quarter of its 120,000 employees as it plans to get back to basics. The largest cuts will be in its international and investment banking units.

This morning Lloyds announced a 35% increase in its nine-month profits to £6 billion. The bank outlined plans to cut 9000 jobs over the next three years, which represents around 10% of the workforce. The share price still came under pressure as the bank is still not offering a dividend. The fact that it is still far away from offering a dividend highlights how many difficult years are ahead of it.

Equity analysts are leaning towards being bearish on the stock. Out of the 33 ratings, six are buys, 18 are holds and nine are sells. 27% of the recommendations are sells, which is the highest percentage of sells among the big five British banks.

If Friday’s figures show a positive contribution from previous bad loan provisions it will be the second time in five years, the first being the second quarter of this year.

RBS hit an 11-month high in September on the back of the positive guidance for its third-quarter figures. If the high expectations can be matched then the stock could target £3.79. The 200-day moving average of £3.37 is providing support, and a drop below that could put £3 in sights. 

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