The Royal Bank of Scotland (LSE:RBS) just reported its third-quarter earnings and the news is not good for the RBS share price.
In the three months to 30 September the bank made a pre-tax loss of £8m. Not so desperately bad, it may seem. But compared to Q3 2018’s £961m profit, it doesn’t look so hot.
Since the start of October the RBS share price has jumped almost 12% so shares aren’t cheap. And the RBS share price is particularly sensitive to Brexit news. When seemingly positive murmurings came out of Number 10 Downing Street about a possible EU deal, the shares leapt by 11% in a single day.
I think this fragility will continue to make the share price vulnerable to further swings in the coming months.
PPI’d off
The bank admitted it had been forced to set aside another £900m to cover claims against mis-sold PPI which came in after the 29 August deadline.
A rush on last minute claims meant Lloyds had to pay out up to £1.8bn in Q3 2019, while Barclays, which is due to report its own set of third-quarter earnings on 25 October, said it would be hit to the tune of between £1.2bn and £1.6bn.
There could also be more pain to come. RBS finance director Katie Murray said calling this end of the PPI profit-bleed would be “very brave“. Read into that what you will.
Future hopes?
Long term RBS holders may be forgiven for taking profits and getting out before these earnings landed on the mat. But is there a good buy-in opportunity for new investors?
While RBS reckons its earnings for the year will be in line with expectations — a boost in these volatile times — there’s little here for me to recommend.
Earnings per share for the quarter have dipped into the red at -2.6p, compared to 11p for the second quarter to 30 June 2019.
Dividends of 2.4% are not wowing the market and at a trailing price-to-earnings ratio of 17.3 I believe there are better opportunities out there for your hard-earned cash. While I’d steer clear of the likes of Metro Bank for structural reasons, there are undervalued FTSE 250 bank stocks I do have on my radar.
Another way
One undervalued bank stock I would consider is TBC Bank (LSE:TBC). The FTSE 250 Georgian bank has a much healthier profit-to-revenue ratio than RBS and it is not so susceptible to wild swings in the price of the British pound.
Georgia’s emerging economy is producing strong growth at a time when neighbours in the Eurozone are either weighed down by sovereign debt, like Italy, or heading into recession, like Germany. Georgia is not part of the EU yet, but it definitely wants to be.
According to the World Bank, business lending in the country is shooting upwards as new economic reforms and regulations have taken hold.
TBC is taking advantage of this booming private sector and its results show it has a whopping 38.5% market share of loans in Georgia. A price-to-earnings-growth ratio of just 0.4 suggests there is still significant upside potential in this stock.
It offers a decent 4.3% dividend on top of any share price growth, too. Q3 earnings are due out on 14 November, so I would have TBC firmly on my watchlist.