After nearly a decade snoozing, the RBS (LSE: RBS) share price has finally woken up. Year-to-date shares in the company have added 5.3%, smashing the performance of the FTSE 100 over the same period by 3.7%.
In this article, I’m exploring why I believe this performance is just the start of RBS’s comeback.
Ghosts of the past
Over the past decade, RBS’s primary task has been dealing with its mistakes of the past, primarily working out fines and compensation for its part in the 2008 financial crisis. The bank has also been winding down its more risky businesses, working to improve its capital position and settling claims from consumers about mis-sold legacy payment protection insurance products.
When you consider how much the bank has had to deal with over the past 10 years, it’s no surprise the shares have underperformed. But now, most of these problems are finally coming to an end.
RBS reported £752m attributable profit for 2017, its first full year of profit since the crisis as restructuring costs fell and the underlying strength of the business showed through. This performance has continued into 2018. For the first quarter of 2018, the bank reported an attributable profit of £792m, up 200% year-on-year.
As well as a return to profit, RBS recently announced that it had agreed to pay $4.9bn to the US Department of Justice to settle its probe into mis-selling of residential mortgage-backed securities — the last major legacy legal case against the bank.
Not only is this settlement smaller than expected, but RBS’s balance sheet is strong enough to pay it without breaking into a sweat. If the arrangement is confirmed, the payout will cost RBS 50 basis points of its equity tier one capital ratio, taking the figure down to 15.1%, well above management’s target of 13%.
And finally on the PPI front, the Financial Conduct Authority has set a deadline of 29 August 2019 to complain about the sale of PPI.
Look to the future
Now all these issues are almost behind the business, the quality of RBS’s underlying retail bank should begin to show through. City analysts believe that the company concentrates on its core business of retail and business banking, it won’t be long before the group reinstates a dividend. And if the dividend performance of peer Lloyds is anything to go by, RBS could become a dividend champion in the years ahead.
So overall, I believe 2018 is going to be the year RBS finally draws a line under its chequered past and finally returns to growth. The bank’s performance during the first few months of 2018, showcases what it is capable of in my view, and if it can replicate this performance throughout the rest of the year, I believe the shares could trade much higher than where they are today.
For the first time in a decade, there seems to be light at the end of the RBS recovery tunnel.
