RB-yes: How five City analysts reacted to RBS' third quarter results

 
Emma Haslett
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RBS shares rose after it revealed it had swung back to profit in the third quarter (Source: Getty)

Shares in Royal Bank of Scotland rose in early trading after third-quarter results showed it had swung back into profit.

The lender's shares rose as much as three per cent to 289.1p in early trading after the results, which showed attributable profit of £392m in its third quarter, although it also said it had not made progress on a massive settlement with the US Department of Justice (DoJ). Here's what analysts said:

Read more: Watchdog to probe RBS further over restructuring unit

1. Progress on all goals

“Shares rose after third quarter pre-tax profit rose to £871m, more than triple the £255m posted a year earlier.

Net attributable profit was £392m, swinging from a loss of £469m a year ago. The group’s aim is to grow income, cut costs and use less capital across its core businesses and to make progress on resolving legacy issues and it saw progress on all goals in the three months to the end of September."

- Russ Mould, AJ Bell

2. RB-Yes!

"Impairments may have been a shade more than forecast (£143m vs £136m), but investors are clearly giving the still state-owned bank the benefit of the doubt as it continues its phoenix-like rise from the financial cr-ashes. Especially after management reiterated full-year guidance and expectations for a return to full-year profitability in 2018. After three successive quarterly profits, this suggests a potentially expensive fourth quarter in terms of resolving US legal overhang (at least £6bn DoJ fine for MBS mis-selling?).

"It may still be a case of 'next year Rodney'. However, given where the bank has come from in terms of travails, this morning’s positive reception to the update suggests shareholders still of the view that, in the grand scheme of things, it’s not that much longer to wait for those long lost dividends."

- Mike van Dulken, Accendo Markets

3. Cost-cutting works

"The swing to profit was largely due to cost cutting as the low interest rate environment is making it harder for the bank to ramp up revenue.

"The firm is on track to achieve its financial targets, and the share price hit its highest level since January 2016, so investors are clearly convinced the bank is being turned around."

- David Madden, CMC Markets

4. Bracing itself

RBS faces the indignity of suffering a tenth year without a profit, though this really all depends on the timing and size of the fine that’s coming from the US Department of Justice. The fact the bank has said it expects to be profitable next year suggests RBS is bracing for a pretty imminent rap on the knuckles. The large and unpredictable nature of this liability looms large over RBS, and could hamper its ability to pass the Bank of England’s 2017 stress test.

"Looking forward, RBS stands to be a key beneficiary of interest rate rises in the UK, if the central bank actually follows through on its recent hawkish rhetoric. Furthermore, once the quantum of the fine from the US Department of Justice is known, this removes a major barrier for investors who might be considering buying the stock."

- Laith Khalaf, Hargreaves Lansdown

5. Cost-cutting may not be sustainable

"No update on the DoJ investigation and the spectre of GRG still leaves a question mark over whether the bank really can return to profitability next year. Shares have risen 60 per cent in the last year as RBS has begun to show profits, but if investors get a whiff that profits are not coming next year they may lose patience.

"As previously noted, there remains a question mark over how sustainable it is to continue in this fashion. RBS has cut costs at roughly £1bn a year for the last three years, while shedding a third of posts since 2013. Cutting out the fat and around the margins is fine but eating into the core business is a risk but one that is working for now. A chronic lack of profits in the last nine years has hurt RBS’s ability to invest in new platforms and IT.

"Cost cutting is not free but restructuring costs are about half what they were a year before, suggesting that RBS has done much of the hard work already."

- Neil Wilson, ETX Capital

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