Does profit make RBS a buy?

Royal Bank of Scotland shares have traded roughly between 300p and 400p for the past two years. There have been chinks of light in that period, and the taxpayer-owned bank has offered up another with these first-half results. But there is more to be done and a breakout above the 200-day moving average needs to stick this time to imply more significant upside.

Adjusted operating profit fell 7% in the second quarter to £1.8 billion after income halved at the corporate & institutional banking (CIB) division which swung to a £227 million loss, as expected. But group profit did smash consensus forecasts for £1.2 billion. An attributable profit of £293 million beat estimates, too - the City had pencilled in a £0.3 billion loss - helped by the personal & business banking (PBB) and commercial & private banking (CPB) units.

That's certainly a relief given RBS missed City forecasts with a seventh year of heavy reported losses in February. However, add back hefty restructuring, litigation and conduct costs - £1.5 billion for the quarter and £2.8 billion for the half-year - to this latest set of results and RBS lost £153 million in the six months to June compared with a £1.4 billion profit a year ago.

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At least management continue to make RBS "safer". Risk-weighted assets (RWAs) decreased from £392 billion last year to £326 billion this time. That will fall by another £70 billion when the lender's remaining stake in Citizens Financial is sold, probably by the end of this year. Further reductions at CIB will get it down to £224 billion in the fourth quarter of 2016, reckons broker and RBS fan Investec Securities.

RBS's common equity tier 1 (CET1) ratio of 12.3% was also up 80 basis points from 31 March and up 110 basis points since December. It was just 8.6% at the end of 2013. If the Citizens exit goes as planned it should rise to 15.5% in December and 17.5% a year later, says Investec.

Traders also liked a net write-back of impairments for the fifth consecutive quarter - £141 million in the second quarter versus expectations for a £106 million write-down - driven largely by the positive impact of better economic conditions on lending at Ulster Bank.

Elsewhere, tangible net asset value (TNAV) at period-end was 380p, down 4p since March, and RBS trades on 1 times Investec's TNAV for 2015. The broker still rates the shares a 'buy' and sticks with its 395p price target.

As one of the UK banks most geared to a rising rate environment, the Bank of England cannot begin tightening monetary policy soon enough for RBS. Until then, and with meaningful dividends still years away, both capital gains and income are more easily found elsewhere in the sector. Deutsche Bank yesterday cut its target price on RBS from 395p to 355p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.