Can Royal Bank of Scotland See a Recovery Without Its CEO?

With shares of Royal Bank of Scotland (NYSE:RBS) trading around $9, is RBS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Royal Bank of Scotland is a global banking and financial services group that operates in the United Kingdom, the United States, and internationally through its two principal subsidiaries: The Royal Bank of Scotland and National Westminster Bank. In the United States, a subsidiary of the Royal Bank of Scotland, Citizens Financial Group, is a commercial banking organization. The company includes business segments of UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank, US Retail & Commercial, Global Banking & Markets, RBS Insurance, Central items, Non-Core Division and Business Services. Financial services are gaining traction once again around the world. However, the bank has been seeing some heat lately as the current CEO, who has helped restructure the company, is stepping down. Also, the U.K. Government is asking the bank to split itself into “good” and “bad” portions.

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T = Technicals on the Stock Chart are Mixed

Royal Bank of Scotland stock has been struggling since the 2008 Financial Crisis. The stock has been recovering in recent times but has just broken lower which may not be very positive for it. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Royal Bank of Scotland is trading slightly below its tangled key averages which signal neutral price action, at best, in the near-term.

RBS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Royal Bank of Scotland options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Royal Bank of Scotland Options

37.98%

73%

70%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Royal Bank of Scotland’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Royal Bank of Scotland look like and more importantly, how did the markets like these numbers?

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2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

123.48%

-47.56%

-216.31%

50.87%

Revenue Growth (Y-O-Y)

22.85%

61.81%

-41.14%

-28.28%

Earnings Reaction

-0.38%

0.00%

1.17%

-0.42%

Royal Bank of Scotland has seen improving earnings and revenue figures over the last four quarters. From these numbers, the markets have been expecting a little more from Royal Bank of Scotland’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Royal Bank of Scotland stock done relative to its peers, Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and sector?

Royal Bank of Scotland

Bank of America

JPMorgan Chase

Citigroup

Sector

Year-to-Date Return

-12.33%

10.85%

19.04%

21.97%

18.44%

Royal Bank of Scotland has been a poor relative performer, year-to-date.

Conclusion

Royal Bank of Scotland provides a wide range of banking services to consumers and companies in the United Kingdom, United States, and rest of the world. The stock has struggled over the last several years and is not seeing any positive catalysts. Over the last four quarters, earnings and revenue figures have improved a bit, however, investors have been expecting more from the company. Relative to its peers and sector, Royal Bank of Scotland has been a poor year-to-date performer. WAIT AND SEE what Royal Bank of Scotland does in coming quarters.

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