Royal Bank of Scotland (LSE: RBS) was the top performer of the five FTSE 100 banks in September. A 12% rise in its share price smashed the index’s gain of 3%.
In this article, I’ll discuss why its shares soared, and give my view on its current valuation and prospects.
Volatile
To begin with, it’s worth noting that RBS’s September performance followed a poor showing in August. Its shares slumped 15% that month, compared with a 5% drop for the FTSE 100, and it was the worst performer among the banks.
As August and September have shown, RBS tends to be more sensitive than its peers to changes in sentiment in the wider market. However, having acknowledged the share price is prone to volatility, let’s turn to the more concrete matter of company news.
PPI crescendo
The catalyst for RBS’s poor performance in August was its half-year results at the start of the month in which it revealed it’s “very unlikely” to achieve its 2020 financial targets “given current market conditions, continued economic and political uncertainty and the contraction of the yield curve.”
On the face of it, news in early September continued to be negative. RBS reported that the volume of PPI claims ahead of the 29 August deadline had been “significantly higher than expected,” and that it would be making an additional provision of between £600m and £900m.
Other banks made similar statements, but the market shrugged off the news across the sector. Maybe it was simply the end of the uncertainty of the long-running saga around PPI that kept share prices ticking up, or maybe market participants felt that many of the claims in the huge August spike would prove spurious, and that the banks had (for once) over-provisioned.
Analysts and Alison
The market also shrugged off several somewhat negative analyst releases on RBS over the first half of the month. The most severe came from Deutsche on 6 September. It downgraded the stock to ‘hold’ from ‘buy’, and slashed its price target to 215p from 290p.
RBS’s shares continued to march upwards, and on 20 September reached a month high of 213.5p (15% up from the end of August). This peak came on the day the company named its new chief executive as Alison Rose, almost five months after incumbent Ross McEwan announced his intention to depart. So, this was another outstanding uncertainty put to bed.
The share price eased back a little in the latter days of September, but still ended the month with the aforementioned healthy 12% gain at 207.6p.
Cyclical risk
It’s looking like October’s going to be another volatile month, ahead of the Brexit deadline, with the FTSE 100 plunging 3.2% yesterday — its biggest drop since before the Brexit vote — and RBS’s shares falling back below 200p.
However, I’m less concerned about sentiment and volatility than the risk that, whatever the Brexit outcome, we’re a lot nearer today than at any time in the last 10 years to the next cyclical downturn in the economy.
Personally, I don’t quite see a big enough margin of safety in RBS’s current share price to protect me against earnings and dividend forecasts evaporating in a recession scenario. As such, I’m content to avoid the stock at this stage.