RBS was the beneficiary of good news this morning, propelling its shares back to May highs. More importantly, they extended their 12-month post-Brexit recovery. Many are now looking north towards the highs of 2015 as a potential target. But what is required to get them there?

The good news this morning was RBS swinging back to profit in the first half of 2017, something that has eluded it for the last three years, and by more than analysts were expecting. The is a significant mid-year hurdle to have cleared, boding well for the rest of the year. It may even result in increased guidance come Q3 results in October or a consensus beat of FY results next Feb.

Ironically Q2 results were helped by the Investment Banking activities it is trying to scale back as it shifts focus to a more domestic and UK retail centred operation. In fact, its strong performance in Fixed Income was surprisingly at odds with many of the big US banks who struggled in Q2 from low market volatility. It also suggests the bank may even be doing some things better than its bigger rivals.

However, investment banking wasn’t the only area of progress. Continued aggressive cost-cutting also played its part, allowing higher revenue generation to flow more freely to the bottom line and deliver much improved profits for a second straight quarter. So much so that it could lead to upgrades for both consensus estimates and broker ratings and/or targets in the days and weeks to come.

Restructuring charges nonetheless remain heavy as the bank reinvents itself as a simpler operation post crisis. This after years of uncontrolled expansion pre-2007 that lead to its demise and rescue. A litigation cloud also still hovers over the company and its shares for previous mis-selling. But it’s getting better. Progress has been made recently, with settlements in the US and Europe. However a looming fine/settlement from the US Dept. of Justice is likely to push the company to a ninth straight FY loss in Feb2018. Only then will it be able to declare a clean(er) slate.

Last year the company paid the government (taxpayers still own 71% of RBS since its 2008 bailout) a whopping £1bn for the right to recommence dividends. This was an effort to become as attractive as peer Lloyds. Even if the latter has already been nursed back to considerably better health, justifiable by consistent quarterly profits. Today’s results serve to justify this £1bn payment, signalling profits are indeed possible and that payments may land sooner than expected. This would only go to increase interest in the shares from income seekers, as well as those looking for capital appreciation potential should the bank’s turnaround hold its course.

As it stands, RBS shares have tested 270p this morning, up 10% from recent lows and up 80% since their post Brexit vote worst. On the flip side, the shares remain 35% from their 2015 post financial crisis highs. Some will consider the shares as having rallied too far. Others will see further upside and recovery potential. Whichever side of the fence you sit, there is a trade opportunity. Will the shares rise 15% to revisit round number 300p. Or will they fall 5% to recent 245p lows or an equivalent 15% to April’s trough? With CFDs you can trade both long and short, profiting from up and down moves.

The above interpretation of RBS results is designed to present the company and its shares to you. To allow you make a trading and/or investment decision that ultimately makes you money.  For more of this type of analysis get access to our research and stay abreast of the most important stories moving the markets. Importantly make sure you stay ahead of the game. Allow us to help.

As always, have a great weekend,

Mike van Dulken, Head of Research, 4 Aug 17