Royal Bank Of Scotland (LSE: RBS) reports third-quarter results on Friday. Drawing from Lloyds’ (LSE: LLOY) results, here are a few reasons why RBS stock may rise significantly in the next few days of trading. The same can’t be said about Barclays (LSE:BARC), which reports interim results on Thursday.
Costs & One-Off Charges
“Comparison on a statutory basis of the 2014 results with 2013 is of limited benefit,” Lloyds said on Tuesday. I beg to disagree. This is important for RBS and Barclays, too.
In fact, it looks a lot like “non-recurring” items, which are virtually impossible to forecast accurately, have become “recurring” for banks in this environment. This comes at a time operating costs must come down to preserve earnings, as bank revenues are unlikely to rise above inflation for a very long time.
The consolidate income statement released by Lloyds on Tuesday is revealing.
Sifting Through The Banks’ Results
For the nine months ended September 2014, Lloyds reported underlying profit of £5.9bn (+34% year on year), but pre-tax statutory profit came in at £1.6bn (5% lower than in 2013) mainly because Lloyds reported £4.7bn of additional charges such as “asset sales and other items”, “simplification costs” and “legacy items”.
Not only its costs base remains problematic, but is also highly unpredictable.
Specifically, the bank reported: a) total costs of £6.9bn, which were essentially flat year on year (this is why Lloyds is cutting 10% of its workforce); b) impairment of £1bn (less than half the size for 2013); c) legacy items of £2bn (from £1.3bn in 2013); d) and losses for liability management of £1.38bn, which were included in “assets sales”, are were related to the bank’s ECN exchange offers in the second quarter.
Incidentally, results from Deutsche Bank on Wednesday showed that several one-off items had a big impact on profitability. Litigation costs stood at almost €900m — bad news for Barclays. Deutsche’s operating costs are rising.
From Lloyds To RBS
We’ll see what RBS management tell the market on Friday with regard to costs and one-off charges, in particular. Recent trends are encouraging, however. Half year results showed that RBS is quicker than Lloyds in reducing operating costs, while impairment were much lower. Litigation and restructuring costs, meanwhile, seemed more manageable than in previous quarters. Finally, RBS’s bad bank is outperforming.
If RBS continues to de-risk its balance sheet, its shares could easily rise by 5% to 10% to the end of the year. As you may know, they are much cheaper than those of Lloyds based on several trading metrics. One caveat is that the Bank of England will severely test the British banks’ balance sheets in December.
Barclays Vs RBS
Stress test results released on Sunday showed that RBS could weather a recession better than Lloyds. Its balance sheet isn’t much weaker than that of Barclays, whose stock valuation is boosted by bullish forecasts for margins, earnings and dividend growth. Hefty fines from regulators pose the biggest risk to the shareholders of Barclays, in my view, while one-off charges and a still bloated cost base could catch investors off guard on Thursday, when the bank reports its third-quarter results.
RBS has surprised investors twice since the end of July. In both occasions, its stock rose significantly — and is up by about 10% in the last three months. By contrast, Barclays stock is essentially flat over the period. It has been trading in the 207p-235p corridor since the end of June. Its two-year low of 207p could soon be tested.
