LONDON -- Royal Bank of Scotland (RBS 0.74%) (RBS +0.13%) is the 17.8 billion-pound bank majority-owned by the U.K. taxpayer. The bank had to be rescued by the government following the collapse of Lehman Brothers during the financial crisis. Are its latest share price movements proof of a long-awaited recovery?
Soaring shares in 2012
In the last year, shares in RBS have risen 32%. At their lowest in December 2011, they could have been bought for 194 pence. This coincided with heightened fears of a disorderly break-up of the eurozone.
Investors' concerns over Europe have eased significantly since September. This followed the announcement of a series of measures to support bond rates for the most stricken nations.
In the last three months, shares in RBS are up 35%. In the last week, shares have been making new highs for the year. Today, RBS shares even passed the 300 pence barrier for the first time since August 2011.
The road to recovery
RBS is forecast to report earnings per share (EPS) of 17.3 pence for 2012, followed by 27.6 pence in 2013. The recent share price action suggests that the market is starting to believe in the likelihood of such a profit in 2013. There is also the prospect of the bank returning to paying a dividend in 2014. Finally, RBS' management has started to talk openly about "dealing with" the taxpayer's holding in the bank. This could a trigger a partial sale to the public.
Why I hold
I own shares in RBS. Why? Because I see the potential for them to be trading much higher than they are today. To start, the bank has assets worth far more than the 300 pence share price. With the last results, RBS reported tangible net assets of 476 pence per share. That's more than 50% ahead of today's share price.
I believe that profitable companies should trade at a premium to their tangible net assets. In RBS' case, this could lead to a double-whammy effect. Firstly, RBS needs to demonstrate that it is a profitable bank. The expectations are that it will do so. Provided the bank does not pay out its profits in dividends, improved trading will enhance the bank's assets.
If investor consensus turns and they decide RBS is well set for long-term profitability, buyers would likely chase the shares up to a premium to net tangible asset value. This would put the taxpayer's average purchase price of 50 pence within striking distance.
The news that Swiss bank UBS is preparing to reach a $450 million settlement for its role in the LIBOR scandal was seen as a positive for RBS, as it has reduced expectations of the size of any fine RBS may have to pay.
Could the next stop for the shares be 350 pence?
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