Do the trading updates released today by Scottish financial groups Royal Bank of Scotland Group (LSE: RBS) and Aberdeen Asset Management (LSE: ADN) strengthen the buy case for these battered financial stocks, or should you stay away?
Aberdeen Asset Management
Shares in fund manager Aberdeen Asset Management have fallen by more than 50% from last year’s peak of 509p reached in April. Is this stock now cheap enough to buy or are further falls likely?
Today’s trading update suggests a mixed picture. Net outflows during the final quarter of 2015 were £9.1bn. While disappointing, this is 28% less than the net outflow of £12.7bn reported for the third quarter of last year.
Continued outflows do seem likely, as wealth funds in oil-rich emerging markets continue to liquidate their holdings in order to raise cash. But despite the volatile market conditions, the value of Aberdeen’s funds under management rose slightly during the fourth quarter. A mixture of investment gains and favourable exchange rate effects helped increase assets under management from £283.7m to £290.6m.
A final point worth considering is that recent press reports suggest that Aberdeen founder and chief executive Martin Gilbert is discreetly sounding out potential buyers for the firm. A trade sale could be profitable for shareholders at current share prices.
Aberdeen shares currently trade on a forecast P/E of about 10 and offer a potential yield of 8.5%. Such high yields are often unsustainable, but last year’s results suggest to me that Aberdeen probably will be able to maintain this payout. I suspect that Aberdeen could be a profitable long-term buy for investors who can accept the risk of further short-term losses.
Royal Bank of Scotland
Just when RBS was starting to look like it might be on the road to recovery, the bank has surprised the market with news of up to £3.6bn of exceptional charges.
The biggest of these involves a change in pension policy that will reduce RBS’s net tangible asset value by £1.6bn. In its trading update this morning, RBS also announced a £1.5bn provision to cover mortgage-related litigation claims in the US, and another £500m to cover PPI compensation payouts in the UK.
The net result of these charges will be that RBS’s net tangible asset value falls by 30p to 350p. The bank’s CET1 capital ratio, a key regulatory measure, will also fall, from 16.2% to about 15%.
Although this isn’t great news, it’s not necessarily a big problem for value investors. A CET1 ratio of 15% is still well above the 10% threshold considered safe by the market.
Similarly, the bank’s current share price of around 250p also means that the shares still trade at a 28% discount to their latest tangible net asset value of 350p. A generous discount to net tangible asset value is often seen a key buying signal for value investors.
Given that RBS trades on an affordable forecast P/E of 10, this discount suggests to me that the bank could still be an interesting value buy for investors with a three-to-five-year timeframe.