Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) shares have had quite a ride over the past week or so.
We saw a big jump on Friday 25 July when the bank revealed, a week ahead of first-half results, that it had bounced back to profit faster than expected with a pre-tax profit of £2,652 million, up from £1,374m in the first half of 2013. The share price ended Friday at 364.20, having peaked at 378p during the day.
Russian lending
But the momentum did not continue, and on the day of the actual results on 1 August, the share price dipped a little as RBS revealed details of its cutbacks in Russian lending.
As the European Union and the USA strengthen their economic sanctions against Russia in response to its part in fomenting rebellion in Ukraine, individual banks are reducing their exposure. RBS is the latest, telling us that it cut its lending to the country by £100m to £1.8bn in the first half of the year, and that it is in the process of further reviewing its exposure to Russia in the light of current and further sanctions.
RBS, which told us that its first-half results “show that underneath all the noise and huge restructuring of recent years, RBS is a fundamentally stronger bank that can deliver good results for customers and shareholders“, saw its share price fall back a little on the day, dropping 4.7p (1.3%) to 350.6p approaching market close. But that was better than it had been — earlier in the day the shares had dipped as low as 345.5p.
Cold War II?
Of the current £1.8bn Russian exposure, £900m consists of corporate lending with £600m of lending to banks — but almost half of that bank lending was fully hedged, we were told. RBS said that “following developments in Ukraine, ratings were reviewed, limits adjusted and additional credit restrictions placed on new business. Exposures are also reviewed against any international sanctions“.
And that’s unlikely to be the end of it, with the Western powers pushing ahead with the toughest economic sanctions seen against Russia since the Cold War. There are certainly further risks ahead for banks dealing with Russia.
Buy the shares?
Does this affect my view of RBS as an investment?
No. At this stage in its recovery, even though it is going better than expected, I reckon RBS is still too expensive compared to its rivals — even without any Russian troubles.