Expectations of a Brexit deal going through sent banking shares soaring at the end of last week. The Royal Bank of Scotland (LSE: RBS) was no exception, with a share price increase of over 11% on Friday.
At this point, it’s worth exploring whether RBS’s fundamentals have enough fuel to sustain this rally because if it was purely a one-off, speculative run-up in price, any adverse development can send the share price plummeting just as easily.
At the time of writing, some of Friday’s gains have already been shed, which only increases the likelihood that the spike was purely driven by sentiment. And since we at the Motley Fool are most interested in opportunities that will make the investor richer in the long-term, I believe that we need to consider more sustainable drivers for the share price.
Uncertainty clouds future
The FTSE 100 bank’s latest set of financials are healthy, and net profit actually beat analyst estimates. It also handed out an increased amount of dividends and maintained its 2019 outlook. So far, so good.
I am uncomfortable with the bank’s outlook for 2020, however. It points to “continued economic and political uncertainty” and essentially says that it’s unlikely to achieve its financial targets for the year. This ties in with the explanation for why RBS was one of the biggest gainers on Friday, as hope of some clarity on the Brexit deal surfaced.
But the fact is, that we can’t say that the limbo won’t last much longer, given how the negotiations have gone so far. I’d like to keep this in mind, because RBS has seen challenging times even in the recent past. It has reported losses in two of the past five years, even as it has turned around in the last two years.
Getting the house in order
With little that it can do about the external environment, I like the fact that it has finally sorted out its own house, with long-time employee Alison Rose being confirmed as the CEO late last month, a few months after her predecessor’s announcement of departure. It’s too early to make any assessment of her performance, of course, but if initial share price reactions were anything to go by, investors are happy with her appointment.
Affordable price
Despite the recent increase in share price, RBS’s price-to-earnings ratio (P/E) remains reasonable at 9.4 times (twelve-month trailing), and largely in line with competitor banks like Lloyds at 11 times and Barclays and HSBC at 8.8 times each.
To me, this suggests that this is as good a time as any other to buy RBS. In fact, even after the sharp rise, at its last close the share price was 2% below the one-year average price. I think this share has the potential to appreciate investor’s capital overtime, especially once the external environment turns in its favour. It maybe sometime before your money will be doubled, however.