The government rescue of Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US) was the UK’s worst moment of the financial crisis. Since then, speculation over the bank’s long-term profitability has led to large share price moves.
Anyone owning the shares will have recently enjoyed their outperformance. Could there be more large gains to come?
The recent rise
In the last month, RBS shares are 8.5% ahead. Many commentators claim that Lloyds is better placed to benefit from economic recovery — but its shares are up just 1.1% in a month. Both have done better than the FTSE in that time, which has fallen 0.5%.
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Since the beginning of July, WPP is the only share in the FTSE 100 that has outperformed RBS.
There are only six days in 2013 when the RBS share price has been higher than it is today. At the current share price, RBS is just 2% off a two-year high.
Reasons for the rise
The RBS share price has benefited from three main factors. Less political heat, increased confidence in the UK economy and a low valuation.
One year ago, politicians were calling for RBS to be broken up, claiming that this was a vital step to boost economic growth. Now that UK GDP has been rising and unemployment falling, the prospect of the government’s clunking fist smashing up RBS has receded. A reduction in the break-up risk has boosted the shares.
Add in the fact that a strong economy will always be good for bank profitability and the scene was set for a significant share price rise. RBS’s bargain rating (still a 23% discount to book value) then turbocharged these gains as value seekers piled in.
Verdict
RBS’ recent trading and prospects suggest that the bank has emerged from past losses and is now back to being a profitable bank. The last reported book value of 445p should now be heading upwards, inspiring further share price rises.
I am delighted with the recent rise and stand by my expectation of a 400p share price by the year end. The company’s next trading statement will be key to whether this target is achieved.
