Making Royal Bank of Scotland (LSE: RBS) fit for flight once more has been a mighty struggle, with investors still struggling to make money out of the stricken bank, whose stock trades 10% lower than five years ago. One day it will skyrocket, but for now it remains idling on the launch pad.
Profits up
It is idling today, despite publishing a halfway decent set of Q1 2018 results this morning, with the highlight a 70% rise operating profit before tax to £1.2bn, compared to Q1 last year. Attributable profit tripled from £259m to £792m over the year.
Total income for the three months rose 3% to £3.3bn year-on-year, and was 8% higher than the fourth quarter, just ahead of the average analyst forecast of £3.2bn. The downside is that growth has primarily been driven by trading income, which can be volatile. Operating costs fell £442m, a drop of 18%.
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Going mobile
RBS is continuing to shift customers to its digital operations, with 5.75m customers regularly using its mobile app, up 21% year-on-year and 5% in the last quarter. Current account openings (82% and rising fast) and personal unsecured loans (55%) are rapidly migrating online, while branch counter and ATM transactions continue to fall.
The bank continues to improve its capital position, with its CET1 ratio increasing by 50 basis points in the quarter to 16.4%, ahead of target. It currently trades at a tempting 10.9 times earnings, although my Foolish colleague Royston Wild will remain hard to convince.
Fine inflation
RBS management and investors are now assuming the brace position as they await the next big regulatory fine, despite striking a $630m settlement with the New York Attorney General on its residential mortgage-backed securities investigation.
RBS is due to hold formal talks with the US Department of Justice this month, amid reports that the fine could greatly exceed the $3.5bn the bank has set aside.
Barclays was recently fined $2bn for $31bn of mis-sold US securities, but this is a fraction of the RBS total of $140bn. That suggests to me a fine nearing $10bn, but some claim it could hit $13bn. Until the scale of the punishment is known, buying RBS remains a gamble (one that has not paid off for years).
Flight time
That may explain why the RBS share price is relatively unmoved by today’s results. Management remains in the lap of the regulatory Gods across the Atlantic, and can only cross fingers and wait.
On the plus side, this may be the last of its historical mis-selling issues (something you can never say with absolute certainty). Once this is out the way, the government may finally be in a position to sell off its 73% stake in the bank.
City forecasters are predicting a return of the dividend this year, with a forecast yield of 2.2%, rising to 4.4% in 2019. The dividend potential is certainly tempting. Earnings per share growth are expected to be flat this year, then rise 12% next year. First, let’s see the size of that fine. Then we can start the countdown to lift-off.
