Oil giant BP (LSE: BP) and banking behemoth Royal Bank of Scotland (LSE: RBS) have performed like racing demons over the past 12 months, competing in a hell-for-leather race to the bottom. This has certainly been hellish for investors, who have seen the value of their holdings fall by 16% and 23% respectively.
BP has done better than many in its stricken sector, for example, fellow major Royal Dutch Shell is down 28%. RBS has done far worse than its rivals, however, with Barclays and Lloyds Banking Group down a relatively tame 5% and 8% respectively.
Barclays Bounce?
This suggests to me that Barclays – for once – is the victim of broader forces rather than its own errors. The problem is that these broader forces take the form of the collapsing oil price, which sees no sign of reversing itself as yet, with WTI crude now trading below $40 a barrel. The final hope of an immediate oil price recovery was dashed by the recent Opec meeting, where Saudi Arabia refused to consider cutting production unless all major oil producers did so, including non-OPEC members such as Russia, and that doesn’t seem likely given the desperate battle for market share.
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I suspect the new year could bring further oil price falls and ratchet up the pressure on BP’s dividend payouts, which now offer investors a yield of 6.90%. If oil stays cheap towards the summer and beyond, the dividend may come under threat, despite management’s public commitment. At some point, oil will surely rebound. US shale drillers have shocked the Saudis by their resilience, but next year their remaining oil hedges will expire, and when that happens they may struggle to renew their credit lines, hitting supply.
The further oil falls, the more dramatic the likely rebound. BP should recover, but you may need nerves of steel and barrels of patience while you wait.
RBS Recovery?
2016 was the year that markets finally lost their patience with RBS. At today’s price of 304p, it is well below its 52-week high of 414p. Yet recent Q3 results had the odd bright spot, including £952m attributable profits, up from £896m in Q3 2014. There were also plenty of costs, including £847m on restructuring, aggravated by the £394m fall in investment banking profits, as it scales down the division.
Yet I see signs of hope. The Go-forward bank, based on core NatWest and RBS retail and commercial banking operations, is going forward quite nicely, as RBS rebuilds itself as a more modest UK-focused banking operation. UK personal and business banking on mainland UK generates a healthy 33% return on equity.
The recovery will take time. There is still no dividend but investors are pinning their hopes on a resumption from the end of 2016. Most analysts assume this will trigger a share price re-rating, although forecasts suggesting that Lloyds will yield 5.1% by next December have done little for its share price lately.
RBS will no doubt have to weather more rate rigging and mis-selling scandals, but it is building its capital strength, winding down its exit bank, and can anticipate a more optimistic future. I expect both BP and RBS to recover, but today’s buyers may not reap their rewards until 2017.
