Shares in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) climbed by 13% last week, thanks to strong first-quarter results — but are these numbers simply the result of the bank dumping all its bad news into the final quarter of 2013, or is genuine progress being made?
I’ve picked three figures that I believe shareholders need to monitor closely this year, as RBS executes its restructuring plan.
1. £1.5bn
RBS reported a sharp fall in restructuring costs during the first quarter, boosting its post-tax profits, but the bank warned that “restructuring costs are likely to be considerably higher for the remainder of the year”.
In my view, the best measure of underlying performance is RBS’s operating profit, as this is calculated before impairments and restructuring costs.
RBS reported an operating profit of £1.5bn during the first quarter, double the £747m it reported during the same period last year. Investors should keep a close eye on operating profit this year, as it’s these profits which enable the bank to support exceptional costs elsewhere.
2. 9.4%
RBS’s balance sheet continues to improve, but still has further to go. The bank reduced its non-core loans by a further £14bn during the first quarter, and this helped to lift its Common Equity Tier 1 Ratio, a key regulatory measure, to 9.4%, up from 8.6% at the end of 2013.
Although this is a big improvement for a single quarter, more is needed, as anything below 10% is considered too low for comfort. In contrast, Lloyds Banking Group already has a CET1 ratio of 10.7%.
3. 66%
A bank’s cost:income ratio measures how much of the bank’s income is swallowed up by its costs. RBS reported a cost:income ratio of 73% in 2013, but this fell to 66% during the first quarter.
Although this is a welcome improvement, further gains are necessary for the bank to hit its target of around 55%. Any sustained increase in costs should be a concern — Lloyds reported a cost:income ratio of just 50.7% at the end of the first quarter, and mid-50s should be possible for RBS.
Patience required
In my view, RBS is a buy for the patient. The bank’s shares trade at a 13% discount to their tangible asset value, providing some margin of safety, but I believe dividend payments remain several years away, as does a potential return to the private sector.