This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Q2 Banks – P4 – RBS Q1 reaction
Royal Bank of Scotland (RBS)
RBS Q1 results came in as a pleasant surprise to investors, with the bank beating analyst expectations on most reported metrics and more than tripling its net profits. Operating profit increased +73% YoY (£1.2B vs. £699M consensus), net profit +205% YoY (£792M vs £319M consensus), while total income was +2.8% YoY and +8% QoQ. Strong Q1 results allowed RBS management to confirm its FY guidance and reiterate medium-term outlook.
Initial market reaction focused on these risks, sending the shares to as low as 264.5p in morning trading before recovering some the losses in the mid-day (shares -1.47% at the close). The following days, however, saw a re-appraisal of RBS value, with the bank’s shares trending higher.Despite positive Q1 results, much of the bank’s profits were driven by volatile trading activity rather than retail banking and consumer lending.
On 10 May, RBS shares rallied strongly after news that the bank agreed to settle its ongoing legal dispute with US authorities and pay a $4.9B fine. Despite the new expense, RBS shares jumped as high as 294p, underlining the notion that important corporate news are not limited to earnings releases and significant events can move bank shares even more than positive quarterly results.
Patience is key
A patient investor who is confident in the positive message of RBS results could utilise platform tools such as limit orders to enter a Long position at a point where they believe that initial negative sentiment reaches its limit.
Using CFDs, this could mean entering a Long position around 266p on the day of RBS results, then holding it while the share price recovered to 273p a week later. With an initial position of £7,000 and a deposit of £1,500, this would have implied a return of circa £184 before other trading expenses.
Holding the position even longer until the news of legal settlement and exiting at around 290p would mean a profit of around £631 (before commission and overnight financing costs), a 42% return on the initial £1,500 deposit. At the same time, if the shares kept falling below 266p, investors would have incurred a loss.
Source: CMC Markets, 19 July 2018
Source: CMC Markets, 19 July 2018
Example of a notional RBS deal ticket.
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Prepared by Michael van Dulken, Head of Research
