They say that the time to buy is when the last bull has become a bear. When shares in Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US) rise on a bad news day, I wonder if the fundamentals are underpinning the share valuation.
What’s the big deal?
Another PR disaster hit RBS full in the face this weekend. Vince Cable, the government’s Business Secretary, has complained to regulators over claims that RBS has been opportunistically foreclosing on businesses that were in default.
Fully aware of how popular nasty bank stories are, the media has been reporting this news as though RBS is deliberately damaging the UK recovery. Fortunately, the markets are a bit more hard-headed than that. Investors want to see RBS dealing with problem borrowers swiftly and decisively. While this may be result in some bad PR for RBS, it might not be bad banking.
The fact that the shares are ahead today demonstrates just how robust RBS shareholders are. If they cannot bring themselves to sell on a bad news day with the shares at 333p, how much bad news is already in the RBS share price?
RBS shares today
At 333p, the shares are 13% down on the two-year high that they reached in October. This fall followed the news that the bank would be rushing to sell assets in its non-core ‘bad-bank’ portfolio. This will likely cost £4bn more than planned.
Brokers are forecasting that RBS will report EPS (earnings per share) of 25.7p for 2014. That puts the shares today on a 2014 P/E of 13.0 times profits. The last reported net tangible asset value of the bank was 431p per share, though that figure will fall when the non-core fire sale begins.
The future
The resilient share price tells me that RBS shares could rise significantly if sentiment can be turned. I wonder if the current discussions between RBS and the government on the bank’s ability to pay future dividends could spark this change. If RBS can secure permission to start paying again, this could signify a return to being rated as a normal bank again.
Verdict
Shares in a bank can always fall further. As an RBS shareholder, I calculate that at this price, big rises are more likely than large falls.