Shares in Royal Bank of Scotland
Trashed in the crash
Early this morning, RBS shares plummeted to a low of 24p, down 20%, before bouncing back. This was against a background of widespread market losses, as investors continue to worry about the developed world's finances. As I write, RBS shares are down 9% at 27.6p.
What's more, thanks to a 45.2 billion-pound cash injection from the government, British taxpayers own five-sixths (83%) of the Edinburgh-based bank. Alas, we paid an average of 49.9p a share for our stake, so we're currently sitting on a paper loss of over 20 billion pounds.
Adding an extra 8 billion-pound loss from our 41% stake in Lloyds Banking Group, it seems likely that the British public will nurse a loss from these state-supported banks for some time to come.
RBS = Really Bad Situation
In the first half of this year, RBS racked up a pre-tax loss of nearly 800 million pounds, compared with a profit nearing 1.2 billion pounds in the first six months of 2010.
Why the big reverse in profitability? The simple answer is that RBS has booked hefty one-off charges totaling nearly 1.6 billion pounds. Notably, the bank took a 50% "haircut" on its 1.45 billion pound-holding of Greek government bonds, producing a 733 million pounds impairment charge.
Also, RBS set aside 850 million pounds in compensation for the widespread mis-selling of payment protection insurance (PPI). I'd question whether this reserve is anywhere near big enough. After all, Lloyds has set aside almost four times as much (3.2 billion pounds) to meet PPI mis-selling claims.
RBS also unveiled other disappointing figures, with impairment charges for bad debts and iffy loans rising almost 16% from the first to the second quarter.
Things can only get better?
At the heart of RBS are some strong businesses, notably its U.K. Retail Banking arm and Global Banking and Markets, its mini-investment bank. However, the group is struggling in the face of weak Western economies and reducing demand for credit from both consumers and businesses.
Also, the eurozone's woes are hitting banks hard, as investors fear contagion will spread beyond Ireland and Greece. Mr Market is panicking at the thought of possible bailouts of Portugal, Cyprus, Spain, and even Italy, the EU's third-largest economy.
So far in 2011, RBS shares have fallen 30%, yet they could fall further. As I've warned repeatedly over the past year, banks still face many bumps in the road, including tighter regulation and, perhaps, the enforced separation of investment banks from retail banks.
With no profit or dividend with which to value RBS, estimating its true value is a "finger in the air" exercise. However, RBS has an incredibly low price-to-book-value (PTBV) ratio of 0.2, versus 0.5 at Lloyds, for example.
In historic terms, banks were considered in value territory with a PTBV around one and expensive when this ratio hit two. Thus, either RBS is in bargain-basement territory or investor expectations are plumbing new depths!
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